## 3. Domestic Arrears in Sub-Saharan Africa: Causes, Symptoms, and Cures

## Source details

**Canonical URL:** [3. Domestic Arrears in Sub-Saharan Africa: Causes, Symptoms, and Cures](https://www.imf.org/-/media/files/publications/reo/afr/2019/october/english/ch3.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/reo/afr/2019/october/english/ch3.pdf.md)
- [Structured JSON version](/-/media/files/publications/reo/afr/2019/october/english/ch3.pdf.json)

---

### Executive summary and policy guidance
- Clearance strategy requirements:
  - Consistent with maintaining macroeconomic stability, anchored on inclusive growth, and implemented transparently.
  - If repayments must be rescheduled, prioritize payments that maximize impact on growth and have a positive distributional effect.
- Prevention and support:
  - Strengthen fiscal institutions, including PFM systems, and build buffers.
  - Availability of external financing can help prevent accumulation in the event of sizable exogenous shocks.
  - Put in place mechanisms to monitor arrears as fiscal institutions improve.

### Size, composition, and evolution of domestic arrears (key statistics)
- Prevalence and magnitude:
  - At the end of 2018, 24 out of 30 countries for which data are available had arrears.
  - The average stock of arrears was 3.3 percent of GDP.
  - The maximum observed stock of arrears was 18 percent of GDP (Republic of Congo).
  - Domestic arrears are particularly high in:
    - oil exporters (about 8.5 percent of GDP),
    - countries with a fixed exchange rate regime (4.4 percent),
    - fragile states (4.1 percent).
- Unrecognized and unverified arrears:
  - More than half of sub-Saharan African countries have conducted verification exercises since 2005.
  - More than half currently have unverified arrears.
  - Unrecognized arrears were estimated to be up to 2 percent of GDP at the end of 2018.
- Trends:
  - Average stock of arrears peaked at about 4 percent of GDP in 2016 after declining in the late 2000s.
  - Oil exporters experienced a significant spike following the oil price decline in 2014–15.
  - Text-mining analysis shows domestic-arrears-related terms increased after 2013, reaching record levels in 2016 and 2017.
- Composition by spending type (end-2018 prevalence):
  - Acquisition of goods and services: 53 percent of all sub-Saharan countries.
  - Transfers: 31 percent.
  - Acquisition of nonfinancial assets / investments: 24 percent.
  - Wages and salaries: rare; occur mainly in contexts of severe political instability or large terms-of-trade shocks.
- IMF conditionality:
  - Since 2002, of a total of 111 IMF arrangements with 36 different sub-Saharan African countries, 78 arrangements included domestic-arrears-related conditionality.

### Causes of domestic arrears accumulation
- Overview:
  - Caused by structural factors (primarily weak fiscal and PFM institutions) and cyclical factors (shocks reducing government resources or increasing spending pressures).
- Structural causes (examples):
  - Unrealistic budgeting.
  - Lack of commitment controls.
  - Poor cash management and delays in processing payments.
  - Deliberate deferral of payments.
  - Inadequate sanctions for noncompliance.
  - Empirical associations:
    - Stock of arrears is negatively correlated with indicators of revenue and expenditure outturns relative to projections, spending controls effectiveness, and liquidity management.
    - Stock of arrears is positively correlated with public debt level and long-term volatility of fiscal deficits.
- Cyclical causes (examples and empirical evidence):
  - Large fiscal shocks are leading indicators of substantial arrears accumulation.
  - Country examples:
    - CEMAC oil exporters (Cameroon, Chad, Equatorial Guinea, Gabon, Republic of Congo) accumulated arrears after the 2014–15 oil price decline.
    - Lesotho experienced a sudden drop in SACU revenues in 2016 (about one-third of total government revenues), coinciding with arrears accumulation.
    - Liberia in the early 2000s and Central African Republic in 2013 had arrears well above 5 percent of GDP due to political instability and conflict.
  - Cross-country panel regression (45 countries, 2005–18) empirical findings:
    - A one standard deviation decline in GDP growth results in a 0.9 percentage point increase in the domestic arrears to GDP ratio.
    - A one standard deviation decline in the commodity terms of trade results in a 0.6 percentage point increase in the domestic arrears to GDP ratio.
    - A one standard deviation deterioration in political stability and absence of violence results in a 1 percentage point increase in the domestic arrears to GDP ratio.
    - A one standard deviation decline in the share of oil GDP in total GDP in countries with fixed exchange rate regimes is associated with a 4.3 percentage point increase in the domestic-arrears-to-GDP ratio.
    - Impact of oil shocks by governance: a one standard deviation decline in the share of oil GDP results in a 3.2 (1.2) percentage point increase in the domestic-arrears-to-GDP ratio for countries with weak (good) governance.
- Election cycle effects:
  - Fiscal deficits are higher in election years, with consumption spending pressures that could trigger arrears accumulation where fiscal controls are weak.

### Symptoms, macroeconomic effects, and transmission channels
- General effects:
  - Large and/or persistent expenditure arrears adversely affect real, financial, and social sectors through multiple channels.
- Real sector and growth:
  - Arrears act as discretionary, nontransparent government financing that diverts resources from the private sector and SOEs, increasing cash constraints.
  - Consequences: lower corporate profits and household income, possible bankruptcies, lower aggregate demand, higher unemployment, and lower growth.
- Financial sector vulnerabilities:
  - Arrears can prevent firms, households, and SOEs from servicing loans, leading to deterioration in asset quality and rising NPLs, reduced credit supply, lower investment, and feedback to fiscal revenue shortfalls.
  - Intensity depends on initial financial sector soundness and size/pace of arrears accumulation.
- Social and governance outcomes:
  - Arrears undermine trust in government fiscal position; suppliers or SOEs may withhold tax payments, charge higher prices, delay inputs, or resort to informal payments, increasing corruption vulnerabilities and procurement costs.
- Second-round fiscal costs:
  - A vicious circle: arrears' direct effects weaken activity and fiscal positions, contributing to higher financing gaps and further arrears accumulation.
- Transmission channel summary:
  - Arrears accumulation → financing for government from private sector, employees, and SOEs → cash constraints for suppliers, wage earners, transfer-dependent SOEs → lower profits/incomes, bankruptcies, bank liquidity shortages, rising NPLs → reduced investment, higher unemployment, lower growth → higher deficits, lower tax revenues, constrained fiscal space, debt sustainability concerns, erosion of trust, corruption vulnerabilities, higher procurement costs.

### Macroeconomic and firm-level estimated effects (regression and DSGE results)
- Regression estimates (effects of a 1 percentage point of GDP increase in arrears):
  - Fall in real GDP per capita growth: range of 0.3 percentage point.
  - Impact on banking sector asset quality: NPL-to-total-gross-loans ratio estimated in the range of 0.3 percentage point.
  - Public service delivery: fall of about 0.6 percentage point in the proportion of the population having access to electricity.
  - Firm-level heterogeneous effects (coefficients per 1 percentage point of GDP increase in arrears):
    - Firms' sales growth: –0.331 percentage points (statistically significant at the 1 percent level).
    - Firms' employment growth: 0.323 percentage points (statistical significance indicated in source).
    - Firms' productivity growth: –0.213 percentage points (statistical significance indicated in source).
    - Firms with government contracts can experience larger declines in sales growth (examples down to –6.9 percentage points in source figures).
    - Firms with bank loans record slower job creation.
    - Prepaid sales buffers mitigate adverse effects (0 percent, 50 percent, 100 percent prepaid sales categories).
- Fiscal multiplier and DSGE insights:
  - Financing spending through arrears undermines fiscal policy effectiveness by shifting resources from creditors to government; typically no interest is paid to those financing via arrears.
  - Fiscal multiplier depends on extent of arrears financing, repayment duration, and private-sector liquidity constraints.
  - Larger arrears, longer duration, and less liquidity reduce the multiplier; the multiplier can be negative under extreme circumstances.
  - DSGE model calibration and simulation parameters (Box 3.2):
    - Government spending equal to 25 percent of GDP.
    - Stock of arrears of 5 percent of GDP.
    - Simulated impact of an unanticipated 1 percent of GDP increase in government expenditure.
  - DSGE results:
    - Fiscal multiplier is lower when expenditure is financed through arrears; the longer arrears remain outstanding, the smaller the multiplier.
    - Private sector liquidity constraints amplify negative impact.
    - Multiplier can be substantially lower or negative if expenditure is mostly financed through arrears for a long period and the private sector is liquidity constrained.
    - Scenario parameters illustrated include arrears equal to 20 percent of government spending accumulated for one quarter or four quarters, and extreme cases with arrears equal to 50 percent or 70 percent of government spending accumulated for four quarters.

### Clearance: verification, prioritization, and liquidation
- Three main steps: verification, development of a payment and prioritization strategy, and liquidation; prevention measures should run in parallel.
- Verification:
  - Independent and comprehensive stocktaking to identify illegitimate claims and classify arrears by size, type, creditor, date incurred, and applicable penalties.
  - Cover as much of the public sector as possible (SOEs, local governments), not only line ministries.
  - Empirical examples: audits in Ghana (2017) and Republic of Congo (2019) led to rejection of a large share of initial arrears stock.
- Payment and prioritization strategy:
  - Develop and approve by fiscal authorities; an arrears committee may be desirable.
  - Options when full immediate repayment infeasible:
    - If market or donor financing available and debt sustainability ensured: repay outstanding stock swiftly.
    - If financing limited or debt sustainability a concern: fiscal adjustment, asset sales, and gradual repayment consistent with macro stability.
    - If medium-term repayment capacity too constrained: restructuring of claims (reprofiling and/or discount) may be necessary.
  - Sequencing/prioritization criteria guided by macro stability and inclusive growth:
    - Prioritize wage arrears and arrears to small-scale suppliers (example: Togo, 2018).
    - Prioritize arrears to companies still in operation and individuals who have defaulted on bank loans, especially if banking sector is vulnerable.
    - Prioritize suppliers of critical social services, such as health.
  - Consider vintage, equity, economic effects, financial penalties, and legal risks; set priorities transparently to reduce corruption risk.
- Liquidation options (single or combination):
  - Cash payment: simplest and most effective if resources available (donors, fiscal adjustment, domestic sources). Example: Lesotho cleared some arrears via direct payments from cash raised through additional domestic debt issuance.
  - Bilateral agreements with creditors: restructure overdue claims into contractual debt or new repayment schedules; options include early repayment for a discount, full repayment over a longer period, or banks paying borrowers in exchange for a claim against the state (examples: post-conflict Liberia; Gabon and the Libreville Club arrangement).
  - Securitization: transform arrears into marketable government debt (promissory notes, Treasury bills, bonds) as in Madagascar (2016); risks include low market liquidity and steep discounts during stress.
  - Netting arrangements: cancel reciprocal claims where creditor also owes government liabilities; common between public-sector entities but not advisable because they undermine transparency, accountability, and future tax compliance.

### Financial-stability considerations for restructuring
- Restructuring should be transparent, engage creditors, and consider creditor preferences and uniform treatment to facilitate voluntary participation.
- Prioritize financial sector stability: use bank stress tests to assess restructuring impacts on balance sheets.
- If restructuring depletes bank capital, design a recapitalization plan with minimal fiscal costs, especially under liquidity or debt sustainability constraints.
- Empirical observations:
  - Accumulation of arrears in CEMAC increased stress on banks.
  - Stress tests for the Republic of Congo indicate financial risks from very large haircuts; severe banking sector losses may require government recapitalization at large fiscal cost.
  - Domestic debt restructuring can harm domestic financial system solvency if ex ante financial soundness concerns exist; banking insolvency can lead to output losses.

### Prevention of arrears accumulation and monitoring
- PFM reforms and practices:
  - Credible budgeting, better commitment and expenditure controls, proper liquidity management, and enforcement for line ministry noncompliance.
  - Regular monitoring of arrears by fiscal authorities; supplement with line ministry surveys where procurement occurs outside official channels.
  - Debt offices should oversee arrears clearance once formally recognized.
  - Consider defining arrears explicitly in legislation and stipulating interest payments when commitments are officially in arrears.
- Sound fiscal policy measures:
  - Strengthen domestic revenue mobilization and diversify revenue sources.
  - Build buffers in good times to use during downturns.
  - Use fiscal rules to instill countercyclical policy, build buffers, resist political pressure for extra expenditures, support budget credibility, and help maintain market access during downturns.
- Role of external financing:
  - For countries with limited fiscal space (especially fragile states), timely external financing from donors is often key to preventing arrears after severe shocks.
  - Official financing is often not timely and may arrive after large arrears have accumulated amid PFM weaknesses.
  - Example: Chad—after the 2014–15 oil price shock, despite spending cuts of more than 10 percent of non-oil GDP, the country accumulated arrears exceeding 3 percent of GDP because donor support was not available.

### Policy recommendations and sequencing (concise)
- Clearance agenda:
  - Conduct independent, comprehensive verification of arrears to check claim validity and address governance concerns.
  - Develop a payment strategy based on available financing, debt sustainability, and macroeconomic impact.
  - If sequencing repayments, prioritize based on macroeconomic stability and inclusive growth; negotiate and communicate priorities transparently.
- Prevention:
  - Strengthen PFM systems, build buffers, mobilize revenue, and diversify revenue sources.
- External financing:
  - Ensure timely external financing for countries hit by severe exogenous shocks and with limited market access, alongside PFM and institutional strengthening.

### Data, monitoring, and research needs
- Key data challenges:
  - Lack of standardized definitions, coverage, and regular data due to weak fiscal accounting and irregular audits.
- New dataset:
  - Generated via a survey among IMF desk economists using country-authority data for 2005–18, supplemented with IMF staff reports, staff estimates, text mining, and cross-checks with PEFA assessments since 2005.
- Further work:
  - Build a comprehensive arrears database with regular methodical reporting and monitoring systems across the region.
  - Concerted effort by country authorities, international organizations, and the public to strengthen monitoring and reporting.

*Prepared by a team coordinated by Samuel Delepierre, Alexander Massara, and David Stenzel, composed of Moez Ben Hassine, Krisztina Fabo, Hoda Selim, and Martha Woldemichael, with input from Jean Portier and Samuele Rosa and research assistance from Yanki Kalfa, under the supervision of Said Bakhache and Catriona Purfield.*

*Source: ch3 - 3. DOMESTIC ARREARS IN SUB-SAHARAN AFRICA: CAUSES, SYMPTOMS, AND CURES (PDF chapter content).*

### 3. Domestic Arrears in Sub-Saharan Africa:

### 3. Domestic Arrears in Sub-Saharan Africa: Causes, Symptoms, and Cures

### Executive summary and policy guidance
- Addressing the domestic arrears problem requires specific actions for their clearance. A clearance strategy should be consistent with maintaining macroeconomic stability, anchored on inclusive growth, and implemented transparently.
- If repayments must be rescheduled, priority should be given to payments that maximize the impact on growth and have a positive distributional effect.
- Prevention of arrears accumulation entails efforts to strengthen fiscal institutions, including PFM systems, and to build buffers.
- In addition, in the event of sizable exogenous shocks, the availability of external financing can help prevent the accumulation of domestic arrears.
- Finally, as fiscal institutions improve, countries should put in place mechanisms to monitor arrears and avoid further accumulation.

### The size, composition, and evolution of domestic arrears
- Fact 1: Most sub-Saharan African countries incur arrears.
  - At the end of 2018, 24 out of 30 countries for which data are available had arrears.
  - The average stock of arrears was 3.3 percent of GDP.
  - The maximum observed stock of arrears was 18 percent of GDP (Republic of Congo).
  - Domestic arrears are particularly high in:
    - oil exporters (about 8.5 percent of GDP),
    - countries with a fixed exchange rate regime (4.4 percent),
    - fragile states (4.1 percent).
  - Countries with a higher level of public debt and a weaker Debt Sustainability Analysis (DSA) risk rating tend to have more arrears.
  - Low scores for the stock of domestic arrears in PEFA assessments corroborate the prevalence of arrears.

- Fact 2: “Unrecognized” arrears are widespread.
  - More than half of sub-Saharan African countries have conducted verification exercises since 2005 to assess whether there are legitimate unrecorded arrears.
  - More than half of sub-Saharan African countries currently have unverified arrears.
  - Unrecognized arrears were estimated to be up to 2 percent of GDP at the end of 2018, although a few countries are likely to have accumulated a much larger stock.
  - Unrecognized arrears can be potential claims awaiting an audit, arrears not yet recorded by fiscal authorities, or unpaid commitments to utilities or social security funds.

- Fact 3: Domestic arrears have increased since 2012.
  - After declining steadily in the late 2000s, the average stock of arrears peaked at about 4 percent of GDP in 2016.
  - Oil exporters experienced a significant spike in arrears following the sizable drop in oil prices in 2014–15.
  - A text-mining analysis of IMF staff reports shows that domestic-arrears-related terms increased after 2013, reaching record levels in 2016 and 2017, particularly for oil-exporting countries.

- Fact 4: Arrears to private suppliers of goods and services are the most common.
  - At the end of 2018, most countries owed arrears to private sector suppliers.
  - Arrears most often accumulate on spending for:
    - acquisition of goods and services (53 percent of all sub-Saharan countries),
    - transfers (31 percent),
    - acquisition of nonfinancial assets / investments (24 percent),
    - wages and salaries (rare; occur mainly in contexts of severe political instability or large terms-of-trade shocks).

- Fact 5: Arrears conditionality in IMF arrangements is common.
  - Since 2002, more than two-thirds of IMF arrangements in sub-Saharan Africa include conditionality related to domestic arrears.
  - In more than half of programs, conditionality often took the form of quantitative targets to prevent arrears accumulation, maintain it below a certain level, or reduce the stock of arrears.
  - Structural conditionality focused on audits of domestic arrears or measures to better monitor or prevent arrears accumulation.
  - Of a total of 111 IMF arrangements with 36 different sub-Saharan African countries since 2002, 78 arrangements included domestic-arrears-related conditionality.

### Causes of domestic arrears accumulation
- Overview
  - Countries have accumulated expenditure arrears due to both structural and cyclical factors.
  - Structural factors primarily include weak fiscal and PFM institutions.
  - Cyclical factors include shocks that adversely impact government resources or exert spending pressures: economic downturns, commodity price shocks, tightening of external financing conditions, natural disasters, conflict, and political instability.

- Structural causes (examples)
  - Unrealistic budgeting.
  - Lack of commitment controls.
  - Poor cash management and delays in processing payments.
  - Deliberate deferral of payments.
  - Inadequate sanctions for noncompliance.
  - Empirical associations:
    - The stock of arrears is negatively correlated with indicators that measure revenue and expenditure outturns compared to initial projections, the effectiveness of spending controls, and liquidity management.
    - The stock of arrears is positively correlated with the level of public debt and the long-term volatility of fiscal deficits.

- Cyclical causes (examples and evidence)
  - Large fiscal shocks are a leading indicator of substantial arrears accumulation.
  - Examples:
    - The five oil exporters of the CEMAC—Cameroon, Chad, Equatorial Guinea, Gabon, and Republic of Congo—faced significantly lower fiscal revenues following the oil price decline in 2014–15 and accumulated arrears.
    - Lesotho experienced a sudden drop in SACU revenues in 2016 (about one-third of total government revenues), coinciding with arrears accumulation.
    - Liberia in the early 2000s and the Central African Republic in 2013 had arrears well above 5 percent of GDP due to political instability and conflict.
  - Empirical findings (cross-country panel regression on 45 countries, 2005–18):
    - A one standard deviation decline in GDP growth results in a 0.9 percentage point increase in the domestic arrears to GDP ratio.
    - A one standard deviation decline in the commodity terms of trade results in a 0.6 percentage point increase in the domestic arrears to GDP ratio.
    - A one standard deviation deterioration in political stability and absence of violence results in a 1 percentage point increase in the domestic arrears to GDP ratio.
    - A one standard deviation decline in the share of oil GDP in total GDP in countries with fixed exchange rate regimes is associated with a 4.3 percentage point increase in the domestic-arrears-to-GDP ratio.
    - The impact of oil shocks is larger in countries with weak governance: a one standard deviation decline in the share of oil GDP results in a 3.2 (1.2) percentage point increase in the domestic-arrears-to-GDP ratio for countries with weak (good) governance.
  - Election cycles:
    - Fiscal deficits are higher in election years, with consumption spending pressures that could trigger arrears accumulation in the absence of strong fiscal controls.
    - Some countries undergoing presidential or parliamentary elections tend to experience a small spike in arrears.

### Symptoms: macroeconomic effects and transmission channels
- A large and/or persistent accumulation of expenditure arrears adversely affects the real, financial, and social sectors through multiple channels.
- Effects on the real sector and growth:
  - Arrears provide the government with discretionary and nontransparent financing, diverting resources from the private sector and SOEs, which become more cash constrained.
  - Consequences: lower corporate profits and household income, possible bankruptcies, lower aggregate demand, higher unemployment, and lower growth.
- Financial sector vulnerabilities:
  - Arrears can prevent private companies, households, and SOEs from servicing loans, leading to deterioration in asset quality and rising nonperforming loans (NPLs).
  - Result: reduced credit supply, lower investment, and feedback into fiscal revenue shortfalls and weakened economic activity.
  - The intensity depends on initial financial sector soundness and the size and pace of arrears accumulation.
- Social outcomes and governance:
  - Arrears can undermine trust in government fiscal position.
  - Suppliers or SOEs may withhold tax payments, charge higher prices to compensate for late payments, delay supply of inputs, or resort to informal payments, increasing corruption vulnerabilities.
  - These dynamics increase public procurement costs and undermine public service delivery.
- Second-round fiscal costs:
  - A vicious circle can emerge where arrears' negative direct effects reinforce each other, weakening economic activity and fiscal positions, contributing to higher financing gaps and further arrears accumulation.
- Transmission channels (summary)
  - Arrears accumulation → financing for government from private sector, employees, and SOEs → cash constraints for suppliers, wage earners, transfer-dependent SOEs → real sector (lower profits, incomes, bankruptcies), financial sector (bank liquidity shortages, rising NPLs), social sector (poor outcomes, inadequate services) → higher unemployment, lower investment, lower growth → higher deficits, lower tax revenues, constrained fiscal space, debt sustainability concerns, erosion of trust, corruption vulnerabilities, higher procurement costs.

*Prepared by a team coordinated by Samuel Delepierre, Alexander Massara, and David Stenzel, composed of Moez Ben Hassine, Krisztina Fabo, Hoda Selim, and Martha Woldemichael, with input from Jean Portier and Samuele Rosa and research assistance from Yanki Kalfa, under the supervision of Said Bakhache and Catriona Purfield.*

### 3. DOMESTIC ARREARS IN SUB-SAHARAN AFRICA: CAUSES, SYMPTOMS, AND CURES

### 3. DOMESTIC ARREARS IN SUB-SAHARAN AFRICA: CAUSES, SYMPTOMS, AND CURES

### Macroeconomic and financial effects of domestic arrears
- Regression analysis (with caveats about arrears data limitations) confirms adverse effects of domestic arrears buildup on the economy, hampering growth and the activities of the public and private sectors, as well as the financial sector.
- Key estimated effects (coefficients show the effect of a 1 percentage point of GDP increase in the accumulation of arrears):
  - A 1 percentage point increase in the accumulation of arrears is associated with a fall in real GDP per capita growth in the range of 0.3 percentage point.
  - Impact on banking sector asset quality: NPL-to-total-gross-loans ratio estimated in the range of 0.3 percentage point, reflecting liquidity-constrained government suppliers, SOEs, and transfer-dependent households struggling to meet obligations.
  - Tax revenue: Government payment arrears accumulation translates into reduced tax revenue as companies owed arrears may withhold tax transfers.
  - Public service delivery: A 1 percentage point increase in arrears buildup is associated with a fall of about 0.6 percentage point in the proportion of the population having access to electricity.
  - Corporate sector: Arrears buildup weakens firms’ productivity and sales performance, and dilutes their ability to create jobs.
- Heterogeneous firm-level effects (coefficients show the effect of a 1 percentage point of GDP increase in the accumulation of arrears):
  - Firms' sales growth: –0.331 percentage points (statistically significant at the 1 percent level).
  - Firms' employment growth: 0.323 percentage points (statistical significance indicated in source figure).
  - Firms' productivity growth: –0.213 percentage points (statistical significance indicated in source figure).
  - Specific heterogeneous impacts shown in Figure 3.17 (examples from source):
    - Firms with government contracts experience larger declines in sales growth (coefficients illustrated down to –6.9 percentage points).
    - Firms with bank loans record slower pace of job creation.
    - Prepaid sales buffers firms: 0 percent, 50 percent, and 100 percent prepaid sales categories show progressively smaller adverse effects.
    - Administrative burdens (e.g., required to meet with tax officials) compound negative effects on firm outcomes.

### Social and governance implications
- Arrears accumulation may undermine government legitimacy by influencing citizens’ attitudes toward trust, corruption, and public service delivery.
- Correlation evidence (Afrobarometer indicators) shows higher levels of arrears are associated with:
  - Lower trust in president/prime minister (higher percent of respondents reporting "Not at All" trust) as arrears rise.
  - Lower confidence that government manages the economy "Very/Fairly Well".
  - Greater perception that "All of Them" (tax officials) are corrupt.
  - More respondents reporting "Very Difficult" access to medical care.
- The stock of arrears is lagged by one year in the analyses linking arrears to perceptions.

### Fiscal multiplier, transmission, and DSGE insights
- Financing spending through arrears accumulation undermines the effectiveness of fiscal policy by shifting resources from creditors to the government (tantamount to taxation) because typically no interest is paid to those who finance via arrears.
- The fiscal multiplier effect depends on:
  - Extent to which spending is financed through arrears.
  - How long it takes to repay the arrears.
  - Extent of liquidity constraints in the private sector.
- Larger arrears, longer outstanding duration, and less liquidity reduce the spending multiplier; under extreme circumstances the multiplier can be negative (for example, in countries with a stressed banking sector and existing arrears, additional arrears spending may be contractionary).
- A DSGE model (Box 3.2 in source) illustrates how the fiscal multiplier is affected by domestic arrears in sub-Saharan Africa.

### Clearance of arrears: verification, prioritization, and liquidation
- Clearance entails three main steps: verification, development of a payment and prioritization strategy, and liquidation. Prevention measures must be taken in parallel.
- Verification:
  - Independent and comprehensive stocktaking and verification is the first step to identify illegitimate claims and classify arrears by size, type of expenditure, creditor, date incurred, and applicable penalties.
  - Verification should cover as much of the public sector as possible (for example, SOEs and local governments) rather than only line ministries.
  - Empirical examples: audits in Ghana (2017) and the Republic of Congo (2019) led to rejection of a large share of initial arrears stock.
- Payment and prioritization strategy:
  - Should be developed and approved by relevant fiscal authorities; an arrears committee may be desirable.
  - When full immediate repayment is infeasible, options depend on financing availability and debt sustainability:
    - If market or donor financing is available and debt sustainability ensured, repay the outstanding stock swiftly.
    - If financing limited or debt sustainability a concern, options include fiscal adjustment, asset sales, and gradual repayment consistent with macro stability.
    - If government repayment capacity is too constrained even in the medium term, restructuring of claims (reprofiling and/or discount) may be necessary.
  - Sequencing/prioritization criteria should be guided by impact on macro stability and inclusive growth. Examples:
    - Prioritize wage arrears and arrears to small-scale suppliers (example: Togo, 2018) to relieve liquidity constraints and support aggregate demand.
    - Prioritize arrears to companies still in operation and individuals who have defaulted on bank loans, especially if the banking sector is vulnerable and has not provisioned for losses.
    - Prioritize arrears to suppliers of critical social services, such as health.
  - Consider vintage, equity, and effects on economic activity; weigh financial penalties and legal risks of postponement; set priorities transparently to safeguard against corruption.
- Liquidation options (single or combination):
  - Cash payment: simplest and most effective if resources available (donors, fiscal adjustment, domestic sources). Example: Lesotho clearing some arrears via direct payments from cash raised through additional domestic debt issuance.
  - Bilateral agreements with creditors: restructure overdue claims into contractual debt or new repayment schedules; options include early repayment for a discount, full repayment over a longer period, or encouraging banks to pay borrowers in exchange for a claim against the state (examples: post-conflict Liberia; Gabon and the Libreville Club arrangement).
  - Securitization: transform arrears into marketable government debt (promissory notes, Treasury bills, bonds) as in Madagascar (2016); risk of low market liquidity and steep discounts during stress.
  - Netting arrangements: cancel reciprocal claims where creditor also owes government liabilities (for example tax obligations); common between public-sector entities but not advisable because they undermine transparency, accountability, and future tax compliance.

### Financial-stability considerations for restructuring
- Restructuring plans should be transparent and engage creditors; account for creditors’ preferences and treatment uniformity to facilitate voluntary participation.
- Financial sector stability should be prioritized: bank stress tests are useful to assess restructuring impacts on banks’ balance sheets.
- If restructuring leads to depletion of banks' capital, a recapitalization plan with minimal fiscal costs may be needed, especially under liquidity or debt sustainability constraints.
- Empirical observations:
  - Accumulation of arrears in CEMAC increased stress on banks.
  - Stress tests for the Republic of Congo indicate financial risks from very large haircuts; if banking sector losses are severe, government recapitalization may be necessary at large fiscal cost.
  - Domestic debt restructuring can harm domestic financial system solvency if ex ante financial soundness concerns exist; banking insolvency can lead to output losses.

### Prevention of arrears accumulation
- Prevention requires PFM reforms, sound fiscal policy, and political commitment.
- PFM reforms and practices:
  - Credible budgeting, better commitment and expenditure controls, proper liquidity management, and enforcement for line ministry noncompliance.
  - Regular monitoring of arrears by fiscal authorities; line ministry surveys should supplement monitoring where procurement occurs outside official budgeting channels.
  - Once formally recognized, debt offices should oversee arrears clearance.
  - Consider explicitly defining arrears in legislation and stipulating interest payments when commitments are officially in arrears.
- Sound fiscal policy measures:
  - Strengthen domestic revenue mobilization and diversify revenue sources (important for resource-reliant countries).
  - Build buffers in good times to tap during downturns.
  - Use fiscal rules to instill countercyclical policy, build buffers, resist political pressure for extra expenditures, support budget credibility, and help maintain market access during downturns.
- Role of external financing:
  - For countries with limited fiscal space (especially fragile states like Central African Republic, Chad, Democratic Republic of the Congo), timely external financing from donors is often key to preventing arrears after severe shocks.
  - Official financing is often not timely and may arrive after large arrears have already accumulated amid PFM weaknesses.
  - Example: Chad—after the oil price shock in 2014–15, despite spending cuts of more than 10 percent of non-oil GDP, the country accumulated arrears exceeding 3 percent of GDP because donor support was not available.

*Italic: Source — ch3 - 3. DOMESTIC ARREARS IN SUB-SAHARAN AFRICA: CAUSES, SYMPTOMS, AND CURES (PDF chapter content).*

### CONCLUSION

### CONCLUSION

### Key findings on domestic arrears prevalence and drivers
- Financing spending through arrears is common in sub-Saharan Africa but not unique to the region.  
- The stock of domestic arrears increased in recent years, particularly in oil-exporting countries after the 2014–15 price shock.  
- Domestic arrears accumulation is associated with weak fiscal institutions and PFM systems, and arrears accumulate faster in bad times.  
- Large stocks of arrears are often driven by exogenous factors such as adverse terms-of-trade shocks and political instability, which reduce fiscal space and limit policy levers.  
- Arrears tend to be higher in countries with fixed exchange rate regimes, limited financing options, and in countries in fragile situations.  
- Arrears monitoring is weak; many countries have unrecorded arrears that can be important contingent liabilities.

### Macroeconomic and governance effects
- Domestic arrears weaken private sector activity and undermine financial stability.  
- Arrears reduce the ability of fiscal policy to support the economy by lowering (and under some circumstances turning negative) the multiplier effect of government spending.  
- Accumulation of large arrears reduces resources available in the private sector for production and investment, diminishing the expansionary effect of government spending on aggregate demand.  
- Evidence suggests arrears weaken government credibility: public institutions are seen as less trustworthy, more prone to corruption, and less capable of delivering public services.  
- The breadth and depth of these effects cast doubt on the merit of resorting to arrears as a form of financing.

### Quantitative insights from the DSGE model (Box 3.2)
- Model calibration and simulation parameters:
  - Government spending equal to 25 percent of GDP.  
  - Stock of arrears of 5 percent of GDP.  
  - Simulated impact of an unanticipated 1 percent of GDP increase in government expenditure.  
- Main model assumptions include:
  - Government spending financed through taxes and arrears to private companies.  
  - Companies are liquidity constrained, borrow from banks, and use capital as collateral.  
  - Banks apply deeper haircuts on collateral when the government accumulates domestic arrears, reducing firms’ access to credit.  
  - Government clears arrears after one or more periods by paying the face value without compensating for inflation.  
- Results:
  - The fiscal multiplier is lower when expenditure is financed through arrears accumulation; the longer arrears remain outstanding, the smaller the fiscal multiplier.  
  - Private sector liquidity constraints amplify the negative impact of arrears on the fiscal multiplier.  
  - The fiscal multiplier can be substantially lower and can even be negative if government expenditure is mostly financed through arrears accumulation for a long period and the private sector is under liquidity constraints.  
  - Scenario parameters illustrated in figures include arrears equal to 20 percent of government spending accumulated for one quarter or four quarters, and extreme cases with arrears equal to 50 percent or 70 percent of government spending accumulated for four quarters.

### Policy recommendations and sequencing
- When arrears exist, clearance efforts should top countries’ policy agendas:
  - Conduct an independent and comprehensive verification of arrears, including careful checking of the validity of claims to address governance concerns.  
  - Develop a payment strategy based on an assessment of available financing, debt sustainability, and the macroeconomic impact of the clearance.  
  - If repayments must be sequenced, prioritize based on impact on macroeconomic stability and inclusive growth, and negotiate and communicate priorities transparently to the public.  
- Strengthen PFM systems to prevent new arrears from accumulating:
  - Complement PFM reforms with sound fiscal policy that builds buffers, mobilizes revenue, and diversifies revenue sources.  
- Ensure timely external financing where fiscal adjustment reaches its limits:
  - For countries hit by severe exogenous shocks and with limited market access—particularly those in fragile situations—timely availability of external financing from donors, alongside PFM and fiscal institution strengthening, is often key to preventing arrears accumulation.

### Data, monitoring, and research needs (Box 3.1)
- A key challenge is the lack of standardized definitions, coverage, and regular data on domestic arrears, often due to weak fiscal accounting and irregular audits.  
- A new dataset for this chapter was generated via a survey among IMF desk economists using country-authority data for the period 2005–18, supplemented with IMF staff reports, staff estimates, country-specific information, text mining of IMF staff reports, and cross-checks with public expenditure and financial accountability assessments since 2005.  
- Further work is needed to build a comprehensive arrears database based on more regular and methodical reporting and monitoring systems across the region.  
- A concerted effort by country authorities, international organizations, and the wider public should focus on strengthening the monitoring and reporting of domestic arrears because their macroeconomic impact is too important to be ignored.

*Source: CONCLUSION, ch3 - CONCLUSION, REGIONAL ECONOMIC OUTLOOK: SUB-SAHARAN AFRICA*

---


_Source: https://www.imf.org/-/media/files/publications/reo/afr/2019/october/english/ch3.pdf_