Public Debt Auditing by SAI Maldives Financial Audits on the - - PowerPoint PPT Presentation

Public Debt Auditing by SAI Maldives

Financial Audits on the Statement of Public Debt and Statement of Government Guarantees

Presentation to WGPD 2018 Annual Meeting

Maldives

• An archipelago of 1,192 coral islands

grouped into 26 natural coral atolls in the Indian Ocean.

• Islands measures less than 1.8 metres

above sea level.

• 192 islands are inhabited by its 400,000

inhabitants.

• 900 islands remain uninhabited islands

except for more than 100 islands that have been developed for the tourist market as resorts.

• With its abundant sea life and sandy

beaches, Maldives is portrayed as a tropical paradise.

• Tourism accounts for 28% of the GDP.
• Fisheries accounts for 3.5% of GDP and 20%
• f local employment.
• Over 90% of the state government income

comes from import duties and tourism- related taxes.

Institutional Arrangements for Public Debt Management

MOFT

Formulate and Implement Fiscal Policy. Transacts Loans and Borrowings Issues Government Guarantees on behalf of the Government ERMD acts as the Debt Management Office (DMO)

Front Office Middle Office Back Office

Institutional Arrangements for Public Debt Management (Cont.)

MMA The Central Bank

• As an agent of

the Government manages the issuance of

1) Treasury Bills (28-day, 91- day, 182-day 364-day) 2) Treasury Bonds - medium to long-term debt securities pay a coupon periodically

• ver the life of the security

3) Islamic Securities Mudharabah, Murabahah Sukuk Murabahah.

• The accounting records

related to treasury bills and bonds are maintained at the MMA with periodical reporting of the balances to MOFT.

• The accounting records

related to treasury bills and bonds are not recorded at a transaction level using the CSDRMS.

MOFT

Requires to produce the Consolidated Financial Statements of the State

Receipts and Payments Budget Statements liabilities of the State. Statements of Public Debt.

in accordance with generally accepted account principles

Requires to comply with public finance legislations

to the borrowing of loans

• n behalf of the State.

Requires to produce a debt report on a quarterly basis

The report should include: Principle Amount of Loans, Interests incurred, Amounts disbursed Outstanding balances

Financial Reporting Requirement

Mandate of the Auditor General

• 1. Public Finance Act

Requires Government to prepare and submit to the Auditor General the Consolidated Financial Statements of the State which includes:

• Statement of Comparison of Budget and Actuals
• Statement of Assets
• Statement of Liabilities
• Borrowings of the State
• Contingent Labilities
• 2. Audit Act

Requires Auditor General is responsible to

• Audit State Offices, Accounts, and State Owned Enterprises
• Enhance the performance and accountability of the accounting and financial systems of State

Offices, State Owned Enterprises including the Joint Ventures

• Established Standards Policies and Procedures of Auditing in Maldives
• 3. Fiscal Responsibility Act

Requires Auditor General to provide opinion on the following statements produced by the Government relating to government budget and public

• debt. These reports includes:
• Fiscal Strategy Statement
• (enhances the public awareness about state fiscal policy, established a mechanism to

measure actions carried out by the Government to attain the goals of state fiscal policy)

• Budget Position Report
• (provide information on the accomplishment by the Government of the fiscal policy’s goals)
• State Debt Strategy
• (report the level public debt and how the debt level has been established , Comprehend And

Report on The Actions Assumed By The Government In Managing Public Debt)

Our Experience In Auditing Public Debt

Audit of

Public Debt Statement

Started

During the year 2011.

Publications

Debt Statement for 2012 issued in sept 2013, Debt Statement for 2013 issued in March 2018.

Guarantee Statement for 2012 issued in August 2017,

Backlogs

Debts Statement for 2014 and 2015 is expected to be issued by 31/5/2018. Guarantee Statement for 2014 and 2015 is expected to be issued by 31/5/2018

Our Experience In Auditing Public Debt (Cont.)

Audit of Public Debt Statement

Methodology and Practices

developed with consultancy support from a former NAO UK financial audit expert and consultants from KOSI Korp.

Objectives

Initiated in response to the increasing debt levels and the concerns raised by members of Parliament of the Public Accounts Committee.

Scope

PAC requested to conduct a “comprehensive debt audit” Requested proved to be challenging. Decided to narrow down and focus on the more important issues of public debt. Including financial opinion

Standard Applied

US GAO’s public debt reporting practices.

Public Account’s Committee Requisition

• Conduct a “comprehensive debt audit”. Requested proved to be challenging.

Scope

• Narrow down and focus on the more important issues of public debt including financial opinion

Financial Opinion - truth and fairness of the Statement of Public Debt

• Risk Based Audit, Materiality, Audit Assertions (Completeness, Accuracy, Existence, Measurement, Fair Presentation)
• Financial Reporting Framework for Public Debt – In the next additional slide can you please include the qualification basis from one of our debt reports as an

example

• Not defined by Accounting Standards
• IMF Debt Guide
• Definition of Gross Debt
• ”all liabilities that are debt instruments”.
• Debt instruments
• “…financial claims that require payment(s) of interest and/or principal by the debtor to the creditor at a date, or dates in the future”.
• Institutional Coverage of Government
• GL1 – Budgetary Central Government
• GL2 – Central Government (GL1 plus extra budgetary units and social security funds
• GL3 – GL2 plus state and local governments
• GL4 & GL5
• Instrumental Coverage of Debt – Types of Debt Instruments
• Valuation of Debt Instruments (Market or Nominal)
• Consolidation of Intra-Government Holdings

Statement of Public Debt – Audit Scope

Financial Opinion - truth and fairness of the Statement of Public Debt

• Risk Based Audit, Materiality, Audit Assertions (Completeness, Accuracy, Existence, Measurement, Fair Presentation)
• Financial Reporting Framework for Public Debt – Not defined by Accounting Standards
• IMF Debt Guide
• Definition of Gross Debt
• ”all liabilities that are debt instruments”.
• Debt instruments
• “…financial claims that require payment(s) of interest and/or principal by the debtor to the creditor at a date, or dates

in the future”.

• Institutional Coverage of Government
• GL1 – Budgetary Central Government
• GL2 – Central Government (GL1 plus extra budgetary units and social security funds
• GL3 – GL2 plus state and local governments
• GL4 & GL5
• Instrumental Coverage of Debt – Types of Debt Instruments
• Valuation of Debt Instruments (Market or Nominal)
• Consolidation of Intra-Government Holdings

Statement of Public Debt – Audit Scope (Cont)

Statement of Public Debt – Audit Scope (cont.)

Compliance Opinion - compliance with applicable legislative laws, regulations and agreements

• Borrowing procedures
• Reporting procedures
• Borrowing limits
• Payment schedules

Other Matters – Reference to Published Debt Reports

• Trend Analysis
• Debt Management Strategy
• Debt Sustainability Analysis
• On-lending to SOEs

Finding Reported on the Statement of Public Debt 2013

1) Non Preparation of Quarterly Public Debt Reports

• As per Section 11.05 of the Public Finance Regulations (issued on 11/02/2009) the Ministry shall

maintain debt records and prepare Quarterly Public Debt Reports within 45 days of each Quarter end date.

• Contrary to this MoFT has not prepared the quarterly Debt Reports for the year 2013.

2) Public Bank Account Overdraft Facility Exceeds the Limits

• As per the Agency agreement titled “Cash and Domestic Debt Management” between

MoFT and Central Bank MoFT the treasury account shall not be overdrawn by over MVR 100,000,000 at the end of any month.

• Contrary to this as at 31st December 2013 the PBA was overdrawn by MVR

2,475,985,941.

3) Lack of Debt

Management

Strategy

• A Medium-Term Debt Management Strategy (MTDS) was prepared by MoFT for the year 2012-2014 and

endorsed by the President. The key objectives stated in this strategy include:

• To ensure that government financing needs are met at reasonable costs, subject to a prudent level of risk.
• To develop a domestic debt market with a long maturity profile of instruments and a diversified investor base.
• MoFT has not implemented Debt Management Strategy

Audit of the Statement of Government Guarantees

Government provides guarantees to financial institutions on behalf of SOEs as the Guarantor of the loan in case of default. Recently Guarantees provided to Private Parties for major projects. Contingent Liabilities – Disclosure required on the nature of these contingent government guarantees. Separate audit and procedures carried to ascertain the exposure of the government guarantees at year end. Confirmations sought from financial institutions and checked for reconciliation with accounting records of SOEs and MOFT.

Issues Reported on the Statement of Public Debt 2012 as Other Matters

Absence of risk management mechanism

Guarantees by the Government can help meet policy and development

• bjectives but also create fiscal risks. To manage these risks, there should be

risk management mechanism that includes the analysis and measurement of

• risks. In contrast to this during the audit, there was no evidence suggesting

that the MoFT has designed a sound risk management mechanism for the Guarantees that it provide on behalf of the state.

Recommendation

MoFT shall design a sound risk management framework for Guarantees that it has

• provided. The frame work shall

encompass:

1) Defined risk management objectives, 2) An analysis of risks, and 3) the design and implementation of a risk management strategy incorporating monitoring, reporting, and reassessment procedures

The current situation of public debt (excluding publicly guaranteed debt) of Maldives:

40% 39% 42% 67% 72% 74% 77% 62% 54% 57% 59% 61% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Public Debt as a Percentage of GDP Public Debt as a Percentage of GDP

• Public debt has

increased substantially over the past couple

• f fiscal years.
• A positive

trend has been recorded from 2012 to 2014,

• Debt level has

been elevated by 7% from 2014 to 2017

• Main Couse debt

increase Developments of Mega Projects in Maldives

IMF has produced a set of indicators for indebted countries to use to assess the sustainability of their

• borrowings. One of these indicators is a legal

requirement under Section 32 (b) of the Fiscal Responsibility Act (7/2013). The Act states that the aggregate level of debt to GDP should reach 60% of GDP within 3 years, starting from May 2014.

In 2013, Maldives was classified as a Medium performer with a 3-year average score of 3.28

250% 250% 250% 250% 250% 250% 250% 250% 120% 116% 141% 309% 301% 269% 246% 217% 2006 2007 2008 2009 2010 2011 2012 2013 IMF Threshold Debt to Revenue

Maldives performance against IMF Debt sustainability framework

114 150 201 370 528 622 751 828 974 1,120 1,227 4,382 1,442 102 129 193 141 106 139 141 128 656 1,183 1,338 1,178 2,178

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Domestic Interest External Interest

Cost of Debt Service

250% 250% 250% 250% 250% 250% 250% 250% 250% 250% 250% 250% 120% 116% 141% 309% 301% 269% 246% 217% 209% 192% 206% 209% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 IMF Threshold Debt to Revenue

Debt to Reveneue

THANK YOU!