Memoire Online - Public debt of Togo: an attempt to identify the explanatory factors

Master of Science in Public Administration and Development 2011-2013 Academic Years

Acknowledgement

I am grateful to my family my Father Djehoue , my mother Philomene , my wife Marlene and my Two children Ashley and Bradley who have suffered a lot for my long working hours coupled with studies during nights and week end . I also thank the ministry of economics and finance in Togo for their grate support in providing some data for the analysis. I also want to extend my praise to Andrea and Linda for their support trough the program and also to my supervisor Mr. Jackson for his comprehension and assistance.

1 Abstract

Togo is a formal French colony independent since 1960 .The focus of the dissertation will be the public debt of this young country with a particular emphasis on the period from 1980 to 2008 which represents a period of 29 years. During this period the amount of the foreign public debt has increased despite payments done and annulations obtained In itself the increase of the public debt it is not an issue, the real issues are its budgetary and economical consequences which invariably leads to social consequences. A high public debt is often associated with higher financing costs (due to the deterioration of the country credit rating), a trade deficit (to which economists referred to as a twin deficit), a high taxation in the country which limits the economic growth (seen from a liberal perspective) and a problem of equilibrium between generations (younger generations obliged to pay for public deficit generated by their elders).

The objective of this dissertation is to identify or more precisely to confirm some of the explaining factors of the public debt by an empirical testing of a model that assumes that foreign public debt is explained by importations, the service of the debt, the demographic growth, the rate of exchange between the CFA and the dollar.

The devaluation of the CFA francs and the effect of the suspension of international cooperation with the country are integrated to the analysis by the means of dummy variables.

If the explaining factors are retained by the econometric model, we will formulate recommendations in order to reduce the debt and its socio-economical consequences.

Over the past two decades, the economic context of all the Heavily Indebted Poor Countries (HIPC) in general, and Togo in particular, has been marked by unprecedented debt. The debt crisis in developing countries continues to hit the headlines around the world. It is considered to be one of the factors delaying the economic development of poor countries.

The international economic environment has played a predominant role in the worsening of the crisis: fluctuation of exchange rates, decrease in raw materials prices and declining terms of trade, rising interest rates and decrease in loans facilities accompanied by concessional terms. In addition, this crisis is due to internal policies: mismanagement of public debt, misallocation of resources and lack of strict financial discipline.

After the Second World War, Europe was rebuilt thanks to the «Marshall Plan^1(*)». Inspired by this example, in the second decade of 1970, countries got indebted in order to cope with a desire for intensive investment to achieve high growth rates of GDP. This is the hope that the economic growth that started would create the necessary resources for the repayment of loans. Such was not the case, for it has rather led to a circle of indebtedness. This was supported by both internal factors (debt mismanagement and allocation of resources, lack of a sound financial discipline) and external factors (fluctuation of exchange rates, decline in commodity prices, deterioration of terms of trade, devaluation ...).

This environment has led the country to unbearable deficits and low growth rates.

In 1981 the global recession occurred and oil prices declined. On August 12, 1982, Mexico notified its creditors that its central bank had depleted its reserves and it could no longer honor the scheduled payments on the foreign debt. Then, after Mexico, Countries such as Argentina and Brazil took over. This was the beginning of the debt crisis. The solutions to enable to get out of the crisis include: concerted lending, debt relief, debt rescheduling, Structural Adjustment Programs, (SAPs) and the Brady Plan. Countries whose debt was rescheduled used to borrow from the IMF and would give their agreement on stabilization programs inspired by the latter.

A year earlier, the implementation in progress of the SAPs in the 80s was conducted notably with the support of the World Bank (WB) and the International Monetary Fund (IMF).

In the mid 1990s, mechanisms for debt relief (the Brady Plan^2(*) and option menus combining debt reduction and refunding), and all measures to reduce borrowing requirements were not sufficient to reduce indebtedness to a bearable level. In 1996, the Breton Woods Institutions (IMF and WB) launched a joint initiative for the HIPC in order to propose a sustainable solution to the debt problems of poor countries.

Togo did not escape that debt crisis. Thus, as at 31 December 1978, the external outstanding debt amounted to 179 billion FCFA of which 22 billion of arrears of repayment. The debt has trended upward despite repayments, discounts and cancellations obtained. It went from 213.4 billion in 1980 to 349.4 billion FCFA in 1993 that is an increase in real terms of 61% (Debt Directorate, 2008).

In 1994, following the devaluation of the CFA franc in January, the outstanding debt went from simple to double.

Compared to export revenues, pre rescheduling service gives a ratio of 44.2%, while after-rescheduling service is 27%, whereas the threshold allowed is 20%. In this proportion, the debt service is a heavy burden for the Togolese economy.

Since 1984, significant budget adjustment efforts, the results of Structural adjustment Programs (SAPs) initiated by the IMF and the World Bank have yielded positive growth rates reaching 4.1% in 1989. Also, from 1979 to 2008, has Togo benefitted from eleven visits to Paris^3(*) Club. The outstanding public debt of Togo is estimated at 1 106.384 billion CFA Francs as at December 31, 2008.

Despite its exports, the Country will face a difficult economic and financial situation. From the period 1994 to 2008, the ratio of external debt to GDP and public debt to GDP moved from 116.38% to 46.89% and from 123.78 to 79.19% exceeding the tolerable limits (50%). This is due to the birth, next to the foreign debt, of a domestic debt increasing since 1990 due to the sociopolitical and economic environment.

If there is agreement that the search for an appropriate solution to the debt issue necessarily requires knowledge of the factors that influence it, then it is worthwhile to consider the explanatory causes of Togo's debt. This raises a number of questions: How is the public debt of Togo and key ratios? What are the causes of the increase in public debt in Togo? Is there a better strategy to manage government debt?

Hence the interest in the topic: «Public debt in Togo: an attempt to identify explanatory factors»

The overall objective of the research is to identify factors explaining the evolution of public debt in Togo.

To achieve the objective of our study, we hypnotized that there is a positive correlation between the debts ratio and economic performance indicators such as foreign debt service, the ratio of imports / GDP and population growth.

Thus, this dissertation will consist of two technical (2) parts. The first part will be devoted to debt in literature, then we will proceed with the inventory in Togo; the second past will deal with the results of empirical analyses of public debt, estimation and interpretation of an econometric model. These two technical parts will be preceded by a description of the methodology and a brief presentation of Togo as a country to enable the readers to have a precise idea of the geographic and social context of the country.

2 Methodology and research question & brief presentation of Togo

2.1 Methodology and research question

The dissertation will start by short presentation of Togo to enable the readers to situate themselves geographically, historically, culturally and socially

The method that will be use for identifying the explaining factors of the Togolese foreign debt will involve the method of last squares combined with validation tests but before that we must prove that the debt has indeed increased. More precisely we will:

· Define what a public debt is and at which level can it be considered as being excessive .We will define the key terms usually used in the economic literature in relation with debt such as the term Debt itself, public debt, foreign debt, foreign gross debt, foreign public debt, domestic debt, domestic public debt, the service of the debt, concerted loans, the outstanding, the stock of debt, the interest of the debt, the gift element, public indebtness.

We will refer to the international monetary funds conception of what is an excessive debt and we will borrow from RAFFINOT (1998) the conditions that must be respected in order to be able to payback a public debt.

· We will make a review of the literature about public debt in order to identify the main causes of the debt according to researchers, from this review we will choose the factors that we consider pertinent as explaining factors in our econometric model.

· We will reviewing the consequences of the public debt on the economy and the society in order to justify why it is important to reduce it and the choice of the topic of this dissertation.

· Based on data collected we will analyse the structure and the evolution of the public debt of Togo together with the evolution of some pertinent indicators such as the ratio of foreign debt/ gross domestic product, service of the debt/exportations, foreign debt/exportations, service of the debt/gross domestic product, the evolution of the degree of openness of the economy, and the evolution of the importations compared to the gross domestic product.

· Specify the proposed econometric model by précising the explained variable, the explaining variables, the mathematical form of the model. The data consist of time series data, thus it is important for the reliability of the model to make some important tests such as staionarity test and cointegration test.

· Can one identify the explaining factors of the public debt of Togo by using an econometric analysis ?

· Can we explain the debt by importations trough the ratio of importation divided b the public debt ? because This ratio reflects the level of the importations compared to the capacity of creation of wealth of the country and expresses the level of outflow of foreign currencies compared to the total available resources of the country since importations are in general paid in foreign currencies.

· If the demographic growth tends to increase the debt, what about the Gross domestic product per capita?

2.2 Brief presentation of Togo

Togo is a country of 56,000 Km2 situated on the West African coast between Ghana on the west side and Benin on the East side. Togo shares on the north side border with Burkina Faso. Togo politics has been dominated for the last 45 years by the same party. The Political situation in Togo is not totally stable with street demonstrations going on almost every week for different reasons. The current major issues are around the organization of the next parliamentary elections with the opposition calling for profound constitutional and institutional changes as well as changes in the conditions of organization of the elections. According to the World Bank, Togo economic growth was estimated at 3.7% in 2010 and has risen to 3.9% thanks to improved rain fall, improved power supply and an increase in port activities . In fact Togo is very dependent on mining, agriculture and sea port activities. Still according to the World Bank, agriculture employs two third of the Togolese population but accounts only for 45% of the GDP, services dominated by commerce and transport employ 21% of the population and represents 33% of the GDP. In January 2013, the two main markets of Togo have burned impacting adversely the service sector which represents 21% of the GDP. There is therefore a fear that the activities of Maersk Togo, mainly the import side will be negatively affected unless there is a governmental plan to rescue the service sector. Togo is also a net importer. The total container volumes exported equals to 12 550 FFE (forty foot equivalent) while the total import is equivalent to 52880 FFE.(5) Imports represent 83% of the containerised volumes handled in the port of Lomé in 2012, evidencing the fact that Togo is a net importer.

The economic activities in Togo are heavily impacted by the political and economic situation in the neighbouring countries which are Ghana, Côte d'Ivoire and Benin. The political situation in Côte d'Ivoire from 2002 to 2010 is for example an explanation of the sudden growth in the import and export in Togo. The growth in export market was made of export of Cocoa from Côte d'Ivoire routed via Burkina Faso. The below graph is a comparison of the containerised export volumes for the years 2010, 2011 and 2012(6). The increase in 2010 and most importantly in 2011 is explained by the electoral crisis in Côte d'Ivoire and the reduction in 2012 is explained by the return to normal in this neighbouring country after a decade of political instability.

The impact of the situation in the neighbouring countries also impacts the import side of economic activities; Togo has for example seen an increase in the containerised volumes in the month of January in 2012 compared to the same period in 2013 and also in preceding years due to a congestion in the port of Cotonou as a result of a project of building a quay. There is also an infrastructure competition between the different ports on the coast and volumes to Hinterland countries shift from one port to another if there is the adequate infrastructure to facilitate the handling of the goods and their haulage up to the landlocked countries which are Burkina Faso, Mali and Niger. There are two projects of building new quay in the port of Lome which will impact the business of Maersk Togo in the future.

3 PUBLIC DEBIT: FROM LITERATURE TO THE SITUATION IN TOGO

The first part of our study includes two chapters. The first chapter includes the theoretical aspect of indebtedness. The second part is devoted to the descriptive analysis of public debt in Togo.

The first chapter includes in its first section the notion of public debt; in the second section, the causes, consequences and reasons of public debt will be presented. The second chapter is on the descriptive analysis of the level of indebtedness in Togo. Thus, external debt in examined in the first section and the second section is on the analysis of domestic debt.

3.1 PUBLIC DEBT AND ITS EFFECTS IN LITERATURE

4 Introduction to public debt, sustainability or debt viability

4.1.1.1 Notions of debt and debt sustainability

4.1.1.1.1 Notions of debt

Debt means any commitment represented by a financial instrument or any other legal equivalent^4(*).

Public debt is the debt incurred by a State with individuals, banks, companies and States. External public debt and domestic public debt are all public debts.

External debt of a State represents all loans incurred by the public powers/authorities of a country with creditors (private, public, bilateral or multilateral) external or non residents. It can be public or private, bilateral or multilateral; it can also be commercial.

Gross external debt is equal to the amount, at a given date, of the actual and unconditional current outstanding commitments involving the obligation for the debtor to make one or payments to repay the major part and/or repay interests at one or several times in the future and that are owed to non residents by residents of an economy^5(*).

According to the World Bank, the external public debt is any debt payable in foreign currencies to foreign creditors whose initial or extended maturity date exceeds one year, and is either incurred directly by a public organization of the borrowing country, or is guaranteed by the State.

The domestic debt of a country is all the commitments made by the State to stakeholders residing in the country and expressed in local currency.

The ·domestic public debt· means debt instruments issued by public authorities (Central government, regional and local authorities and public enterprises).^6(*)

The debt service includes all payments made in settlement of a particular liability notably of the principal, interests and late payment charges.

In addition, debt repayment depends on the level of interest rates and exchange rates, since a significant portion of the outstanding debt is quoted in dollars, and at variable rates.

The stock of the debt provides a useful and rapid measure of the future charge of the debt related to the existing debt.

Debt interest means the main charge to pay on a loan, which is calculated on the disbursed and non reimbursed part of the capital, for penalty obviously.

Grant element (or element of concession) is the «subsidy/grant» component of the loans granted to development assistance organizations. According to the classification of the IMF and World Bank, a loan is concessional if it comes with a grant element of at least 35%.

Public debt means all assistance requested by a Government from partners (bilateral, multilateral, financial institutions, financial markets, etc.) to fund development activities that have not been supported by the national budget.

4.1.1.1.2 Concept of debt sustainability or viability

The external debt of a country is viable or sustainable in the medium and long term if the Country is able to meet all its current and future liabilities on foreign debt without resorting to an exceptional funding (IMF, 2001).

The analysis of the foreign debt sustainability is carried out through: export related debt, ratio of GDP related debt, the ratio of the NPV of debt to budget revenue and the debt service to exports ratio.

When the debt is accrued at a rate faster than the ability to pay, in such a way that at a certain moment the Country will not be able to cope with the debt service^7(*), the burden of the external public debt can be described as non-viable.

The debt sustainability is the ability of a debtor Country to fully meet its current and future external liabilities without resorting to rescheduling or accumulation of arrears.

According to RAFFINOT (1998), if the following conditions are not met, difficulties in meeting liabilities become highly probable:

- debt outstanding / GDP; this ratio must inferior to 50%.It is an indicator of liquidity,

- the ratio (debt service/exports of goods and services non factors of production) should be inferior to 20%, and

- the ratio (debt outstanding/exports) must be inferior to 150%. It is an indicator of solvency.

4.1.1.2 The different concepts of public debt

The different theoretical arguments of indebtedness will be classified into two concepts groups, and then will be presented the motives of indebtedness.

4.1.1.2.1 Classical and Keynesian views

Classics assimilate indebtedness to future tax and attribute a negative connotation to the State. According to Ricardo (1817)^8(*), citizens see in a loan a tax differed in the future/as time goes by.

They behave as if they were compelled to pay a tax later in order to repay this loan, whatever the intergenerational gap.

In other words, the behavior of economic agents is guided by an anticipation to tax increase.

However, a reservation may be made depending on the nature and quality of expenditures (transfer or investment expenditures) financed by the loan.

For Keynesians, indebtedness does not cause any charges either for future generations or for present ones because of the investments that it generates. In this approach, debt resulting in the boosting of the demand causes by the accelerating effect a more than proportional increase in investment, which in turn induces an increase in production.

The budget deficit which, led by successive flows to increase the stock of debt, produces the expansion of the economic cycle by demand and autonomous investments. The deficit to which the loan corresponds stimulates demand and can reduce the cost of repayment. This argument is plausible as underemployment of productive resources exist, according to Keynesian^9(*) theory.

4.1.1.2.2 The other conceptions

4.1.1.2.2.1 Alternative approaches to Keynesian theory

For proponents of this hypothesis^10(*), if in a country there are two parties that are potentially in position to access the power frequently these parties have different preferences regarding the nature of public spending. The ruling party may decide to increase public spending today by borrowing, in order to satisfy its electorate, at the best to remain on power and at the worst not to make life easier for its opponent. By so doing, it creates conditions so as to interfere further its political opponent in terms of managing the budget, if the latter were to gain power. It now undertakes future tax revenues and therefore reduces the potential future expense of its opponent especially if the debt happened to be significant.

4.1.1.2.2.2 The concept of the school of rational expectations

According to R. Barro (1974), a budget deficit policy financed by the loan has no stimulating effect on the economy, since the agents are not victims of fiscal illusion. These agents then anticipate an increase of the taxes intended to repay the loan by providing a savings equivalent to public debt (theorem of equivalence or of Barro- Ricardo)^11(*). Thus, whatever the modalities of financing deficits, the long-term effects are equivalent. This general proposition therefore means the neutrality of public debt in the long-term (fiscal and budget multiplier showing a trend toward zero).

According to Robert Lucas (1972), the idea of rational expectations is that the agents are able to take advantage of all available information to form their expectations, so that in stochastic average, they are not wrong.

4.1.2 CAUSES, CONSEQUENCES AND MOTIVES OF PUBLIC DEBT

4.1.2.1 Causes of public debt

The weakness of domestic savings and the importance of funding requirements very often justify the resort to external financing. But debt sometimes appears as the result of a deliberate policy choice. Public debt may come from exogenous or endogenous causes.

4.1.2.1.1 Exogenous causes

Following the economic slowdown in the late 70s in industrialized countries, incomes in developing countries declined not only because their growth rate slowed down but also because the prices of their exported raw materials diminished compared to the prices of their exports. This has led developing countries to resort to external loan to make up for the deficit in resources.

With the oil crisis of 1973-1974, the huge surpluses of oil-exporting countries resulting from the rise in oil prices should be «recycled» to finance the current deficit of the rest of the world. Oil producing countries invested their funds in developed countries and commercial banks and the latter found it profitable to lend them in their turn to developing countries. The resort to credit granted by commercial banks has two advantages:

First: the loans granted by commercial banks do not bind the transfer of funds to the implementation structural adjustment policies.

The conditions were such that even if loan premiums were added, developing countries would be confronted to historically low interest rates for foreign loans: that encouraged them to borrow abroad.

4.1.2.1.2 Endogenous causes

The current deficit of non-oil producing developing countries increased rapidly between 1974 and 1978.

These countries adopted and pursued expansionary policies: they encouraged ambitious investment projects and maintained high growth rates. They developed these measures by significant and persistent deficits: they borrowed heavily abroad to maintain their spending above their incomes. Among internal causes of the resort to foreign debt, after corruption, there are many others.

The choice of a growth model driven by the outside could lead to an increasing indebtedness, for this was one of the conditions of reliability.

The continuing deficit of the balance of payments of developing countries has been partially funded by foreign debt. Over time, the interests paid by these countries become the major cause of the structural deficits of their current accounts. These countries have then entered into a vicious circle, in the sense that external debt increases the current account deficit and hence the balance of payments, while the current account deficit requires more foreign indebtedness.

The loans were used for the construction of infrastructures (roads, dams, etc.) whose purpose is not necessarily to generate resources; there are also white elephants such as oil refineries, iron and steel industry, etc. The loans were sometimes mobilized according to the requirements of national development but according to the needs of the leading country. The aid was then used to create an outlet for the products of the lending country or a market for its business (aid related).

4.1.2.2 Consequences, motives and effectiveness of public debt

4.1.2.2.1 Consequences of public debt

4.1.2.2.1.1 Economic consequences

A large debt is usually accompanied by higher funding costs, which are reflected in turn by a higher debt service. Notwithstanding the risks to future economic conditions, the importance of debt service limits the margin of maneuver of the government. It takes up a large share of fiscal revenues and thus limits the government's spending choices.

In a small open economy, public deficits and debt service reduce public savings, which requires a greater reliance on foreign savings or foreign direct investments. This results in a reduction in trade surplus, or systematically, increasing trade deficits. This is why economists often refer to public and trade deficits as «twin deficits». the real effects of public debt are however less important in a small open economy than in a large open economy or in a closed economy, where the reduction in public savings leads to higher real interest rates and lower private investments (crowding), which in turn affects the growth of the capital stock and ultimately, the potential output.

According to the Ricardian equivalence, public debt is accompanied by an increase in private savings which offsets the reduction in public savings, households anticipating future tax increases and saving accordingly. Ricardian equivalence as well as the interest rate parity in small open economy is limiting the extent of actual macroeconomic impacts of public debt;

4.1.2.2.1.1.1 Economic effectiveness problems

High public debt results in a high tax burden. This high tax burden acts as a break and causes a slowdown in economic activity. Another effect is the potential impairment of the performance of the tax base for the government (avoidance, tax evasion) and uncertainty about future tax conditions and scope of public services that will be available in the future. This uncertainty may adversely affect the retention and attraction of the workforce and capital.

When used appropriately, public debt as a means of financing public investments is a fairness factor.

However, it may become a factor of inequity when used to shift the burden of current spending onto future generations of taxpayers^12(*). Public debt also has potentially important distributional impacts not only between generations but also between members of the same generations (Osberg, 2004).

4.1.2.2.1.2 Social and political consequences

Public debt and the many problems it can cause are likely to influence the political landscape. For example, a problem that can arise is the difference between the taxes paid by individuals and the services they receive in return. When there is a balanced budget, the debt service introduces a gap between taxes paid and public services received by taxpayers. This gap feeds into the population the impression that taxpayers «do not get their money»^13(*) .Therefore, the profitability of the tax base may be affected, as well as the support for government programs.

4.1.2.2.2 Reasons for debt

4.1.2.2.2.1 The reasons for debt

«Loans to fund unprofitable investments or import of consumer goods, can lead to debts that borrowers cannot repay «(Krugman, 1996). Several reasons may justify the debt.

In literature, debt is related to an imbalance. Three likely reasons may lead a country to borrow:

·- To finance a high level investment: a country with a potential productive investment and which has not a very sufficient domestic savings to finance this investment can borrow;

·- To smooth fluctuations in consumption in case of loss of income : a theoretical current account deficit may result from negative exogenous chocks such as declining terms of trade, a recession or a natural disaster. Thus, to overcome these problems, a country may incur external debt to maintain the level of absorption;

·-To avoid facing an adjustment to internal and external imbalances: the unsustainable current account deficit must be adjusted by changes in economic policies.

-financing of budget deficit, public spending being higher than the State revenue;

-Implementation of monetary policy (open market operations: purchases or sales of bonds to absorb or inject liquidity);

-Development of the financial market which requires a constant supply and a range of financial instruments to be traded.

4.1.2.2.3 Effectiveness of external debt

Contrarily to the ideas developed above, some economists wonder rather on the ability of external funding to develop a country (since if a country borrows, it is necessarily to achieve its development projects).

Especially for radicals, external funding can only be impoverishing for the recipient economy since it is nothing other than a new manifestation of imperialism at the highest stage of developing capitalism in a state of perpetual enslavement.

For liberals, external funding is the manifestation of the spirit of solidarity of the so-called developed countries who generously put at the disposal of developing countries funds that can enable them to meet both their savings and development deficit, and thus hoisting them on the royal road to economic growth and development.

4.2 DESCRIPTIVE ANALYSIS OF THE LEVEL OF PUBLIC DEBT IN TOGO

4.2.1 STRUCTURE OF THE DEBT AND DESCRIPTIVE STUDY OF THE EXTERNAL DEBT OF TOGO

4.2.1.1 Structure of the public debt, external debt structure and its evolution

4.2.1.1.1 Structure of public / government debt

The Togolese public debt is divided in to domestic debt (35.84%) and external debt (64.05%) at 31 December 2008. These figures are explained in the table below:

4.2.1.1.2 Structure and evolution of the external debt

4.2.1.1.2.1 Structure of the external public debt

Togo`s external debt is mostly a long term debt. It comes mainly from public loan for development and structural adjustment loans; and then if need be from private origin (commercial debt).

Togo `s external debt is divided into multilateral debt, bilateral debt with Paris Club, bilateral debt with non Paris Club and Private debt owed to private banks.

4.2.1.1.2.2 Evolution of Togo's external debt between 1980 and 2008

- The outstanding debt has trended upward despite the repayments, discounts and cancellations obtained. It moved from 213.4 to 349.4 billion CFA francs in 1990, which is an increase in real terms of 61%. This increase is the result of the combined effects of three factors including:

3 - Changes in exchange rates of some major currencies including the dollar, pound sterling, the Swiss franc, etc.

- In 1994, following the devaluation of the CFA franc in January, the loans outstanding went from single to double as the exposure is denominated in foreign currency for nearly all loans. On January 1^st, 1994, the loans outstanding were 349.4 billion CFA francs and on 31 December 1994 it amounted to 707.5 billion CFA francs.

- From 1995 to 2008, the increase in debt was irregular and can be explained by the breakdown of international cooperation with some donors. It is however mitigated by the efforts made by the government refund, cancellations from member countries of the Paris Club and the substantial discounts that have been granted by friendly countries. December 31, 2008, the outstanding external debt of Togo was about 709.88 billion CFA francs.

4.2.1.1.3 Evolution of some weighty indicators of the external debt from 1980 to 2008

4.2.1.1.3.1 Evolution of the outstanding external debt / GDP

The approach by this ratio shows that over 100% of the GDP was needed to repay the debt if it became due in 2000. Chart N°1 in Appendix 1 shows that the debt-equity ratio was greater than 50% (critical threshold) over the period from 1980 to 2008. We deduce that the level of external debt is very high because beyond 50%.

However, from 2001, this ratio decreased gradually. This improvement was due to the depreciation of the dollar against the euro.

4.2.1.1.3.2 2. Evolution of the ratio of external debt service /exports

The evolution of this ratio (chart 2, appendix 1) shows a saw tooth evolution. A cyclical phenomenon can also be deduced from this. Its improvement over time can be explained by the depreciation of the currencies in which the loans granted to Togo are denominated.

Prior to 1997, this ratio was above the critical threshold of 20%.Then, the trend has reversed. Thus the burden of debt service has not resulted in reduced consumption possibilities and productive investment in the nation since 1997.

4.2.1.1.3.3 Evolution of the external debt / exports ratio

The external debt / exports ratio was almost always higher than the threshold of 200% (chart N°3, appendix 2).The graphical analysis of this ratio enables to notice that the weight on the national economy was almost always heavy. Below the threshold before 1989, this ratio has evolved and reached its highest level at about 500% in 1993.This ratio shows a downward trend. Since 2004, this ratio has been below critical level.

4.2.1.1.3.4 Evolution of external public debt to GDP

Graph N°4 in appendix 2 shows the curve of service debt to GDP. It shows a good performance of our repayments capacity from 2000 to 2006.This can be explained by the increase in GDP over the period. Given this graph, it appears that the payment of debt service in Togo has not dramatically worsened the already precarious situation of the economy and the population. The ratio is very low between 2000 and 2006. It did not capture the large share of government revenues.

4.2.1.1.3.5 Evolution of the degree of openness

The degree of openness is calculated by the following formula (exports + imports) /GDP). The observation of the trend (graph 5, Appendix 2) between 1980 and 2008 reveals a downward trend. This trend reflects the difficulties of the country to acquire foreign currencies that can allow it to facilitate the repayment of the debt charges. The highest openness degree was reached in 1982 and the lowest was observed in 1993.Since 2006, the trend went downward again. As reasons, we can mention among others, the increase in oil prices, floods and their consequences (broken bridges, soaring of foodstuffs prices).

4.2.1.1.3.6 Evolution of export in relation to GDP

Chart N°6 in appendix 3 shows the release of foreign currencies in relation to the resource base of a downtrend. Between 1980 and 2008, an average of 50.4% of GDP was allocated to imports. Given that imports deteriorate the trade balance with a significant decrease in the ratio of reserves to imports, national income should find itself reduced by the game of the multiplier effect of foreign trade; this has resulted in an increase of external debt for their financing.

4.2.2 Domestic debt

Until 1989, Togo's domestic debt was not significant. This debt was partly due to technical and administrative problems and not to cash tensions. But since 1990, as a result of socio-political unrest characterized by the paralysis of economic activities and resource scarcity, the arrears have increased. They went from 1.32 billion CFA francs in 1990 to about 396.508 billion CFA francs at 31 December 2008.

4.2.2.1 STRUCTURE AND EVOLUTION OF DOMESTIC DEBT

4.2.2.1.1 Structure of the domestic public debt

At 31 December 2008, the stock of the domestic debt of Togo accounted for 32.29^o/_o to GDP. It consisted of a commercial debt (18.40^o/_o) owed to private creditors and public enterprises, financial debt (52.33°/₀), which is the set of financial aid granted by banks and public enterprises as well as the bond loans, social debt (23.10⁰/₀) constituted of social contributions owed to the National Social Security Fund and the Pension Fund of Togo and finally, commitments and risks (6.16^o/_o) mainly owed to the Central Bank of West African States and depositors of funds with the Treasury of Togo.

4.2.2.1.2 Comparative evolution of Togo's domestic debt and budget deficit between 1990 and 2008

Domestic debt trended upward and budget deficit has been stranding between 1990 and 2007.

Graph N⁰ 3 : Comparative evolution of domestic debt and budget deficit between 1990 and 2003

The opposite evolution reflects the close link between budget deficit and debt. Both clusters have evolved unevenly.

The causes of massive increase in domestic debt are mainly lower raw materials prices (coffee, cocoa, cotton, phosphates), the Gulf war, the low level of tax revenue, the prices charged by suppliers, suspension of cooperation with the European Union (EU) and the accumulation of arrears.

4.2.2.2 Evolution of some ratios of domestic debt and domestic debt causes

4.2.2.2.1 Evolution of some ratios domestic debt

4.2.2.2.1.1 Trend of the domestic debt / GDP ratio

Domestic debt related to GDP (graph N°7, Appendix 3) between 1998 and 2008 was over 28% of GDP. Its trend was upward until 2000 when it reached its highest rate which was 32.38% of GDP. In late 2008, it was 32.29% of GDP that year. The weight of domestic debt is not at a good level because domestic debt is almost one- third of GDP.

4.2.2.2.1.2 Trend of the domestic debt/ Revenue ratio

The analysis of the curve representing the ratio of domestic debt to income reveals that domestic debt exceeds revenue (Graph N°8, Appendix 3). This reflects the difficulties of the State in the collection of taxes; so this explains this mismanagement in some state-owned companies. We should also consider the inconvenience caused by the energy crisis and the breakdown of financial relations determined by Togo's partners for about fifteen years.

4.2.2.2.2 CAUSES OF DOMESTIC DEBT

4.2.2.2.2.1 Structural causes

The main cause of domestic debt is the financing of budget deficit. For many years, State spending was not covered by tax and non-tax revenues. The budget deficit has widened in the early 90s because of the deterioration of terms of trade. Togo has failed to reduce its budget deficit despite the rescheduling agreements on its external debt.

- the government's efforts to accelerate development and industrialization through economic activities at the expense of the private sector;

- individuals who received loans under the policy of food self - sufficiency became insolvent;

- mismanagement in some State - owned companies has led to the increase of public expenditure according to the need of these companies;

- exceeding the ceiling of BCEAO Statutory advances (20% of tax revenues in the previous year). Statutory advances increased from three billion CFA francs at the end of 1993 to six billion CFA francs in July, and

- military spending in the logic of preserving the integrity of the territory and ensure peace for citizens.

4.2.2.2.2.2 Cyclical causes

Regarding cyclical causes it is the socio-political unrest of 1993 which contributed to widening the budget deficit.

Indeed, the long general strike launched on 16 November 1992 paralyzed economic activity in the country. This strike deprived the government and private sector of resources. Secondly the socio-political events of 1994 led to the failure of financial relations with the EU, depriving the country of foreign aid for about fifteen years.

The devaluation of the CFA franc has also worsened the situation in the country. External debt was simply multiplied by two. This has reduced the State's capacity to borrow abroad. These causes have led to an explosion of domestic debt. Thus, to finance the needs of the country, the authorities turned to domestic financing by borrowing.

5 ECONOMETRIC ANALYSIS OF THE DEBT

The second part of our study consists of two chapters. The fist chapter focuses on the results of empirical studies on debt. The second part is devoted to the econometric study of Togo's external debt. This chapter contains two sections. The first one deals with the econometric study of Togo's debt which will be carried out from the macroeconomic data of Togo. The second section is reserved for interpretations and suggestions.

5.1 EMPIRICAL AND ECONOMETRIC ANALYSES

5.1.1 RESULTS OF EMPIRICAL ANALYSES AND SPECIFICATION OF MODEL

5.1.1.1 EMPIRICAL ANALYSES RESULTS

The works of Barry and Portes (1996) were interested in identifying the determinants of the stock of the debt of about thirty countries at a certain moment of their economy. They conclude that excessive debt and default payment tend to reduce the rate of real growth and credibility of the State. Ojo (1989) in «Debt capacity model of sub-Saharan Africa» by an econometric approach, shows that the ratio of outstanding debt/ GDP of thirty African countries during the period 1976-1984 is determined by: the variation of exports (X), the ratio of imports/ GDP, the population (Pop) and the growth rate of GDP (y). He concluded that the ratio of debt outstanding/ GDP is negatively related to the change in exports, the growth rate of GDP and the ratio of positive imports/ GDP and population growth (Pop).

Ajayi (1991) analyzes the impact of external and internal factors of Nigeria's debt. Indeed, he chose as determinants of the debt / exports ratio, the following variables: terms of trade, the growth rate of industrialized countries' income, the actual interest rate, the ratio of budget deficit/ GDP and trend. He affirms that we should expect that a worsening of budget deficits will increase the debt / export ratio. The estimation results of his model confirm this fact.

N'Diaye (1993); shows that the debt of Senegal is explained positively by the stock of existing debt and negatively by the level of deficit of the current balance. Also, the appreciation of the average exchange rate of CFA/US (dollar?) reduces the debt service. Considering the virtual absence of reserve in Senegal, equation attempts to explain currency movement composed of transaction account, draw on IMF and the contribution of primary banks to finance the balance of payments. He found out that despite the weakness of the correlation coefficient, this explanation of currency movements by the current account and the net direct investment can be retained.

In view of this result and the evolution of the debt in relation to the current account, it is difficult to justify the level of indebtedness of Senegal by looking for a balance of macroeconomic variables. This means that Senegal does not borrow to balance its current account or to increase its investments, because the model shows that the impact of the debt stock on the latter is very low. He also believes that the explanation of currency movements (transaction account) by the balance of the current account and net direct investments is not satisfactory from the point of view of statistical results.

Rougier (1994) found mixed results in African countries. According to his econometric analyses, the debt to GDP has a depressive effect on growth in Côte d'Ivoire, Mali, and Chad for the period 1970-1991. However, the effect is positive for Niger, Madagascar and Kenya.

Cohen (1996) shows empirically that the debt has weighed on growth in developing countries. However, the impact of the debt on growth reduction is negligible for Burkina-Faso, Kenya, Mauritius, Rwanda, South Africa, Zaire, Zimbabwe and Mali.

Coulibaly and al. (2001) in a study on Mali's debt showed that statistical indicators such as interest rate, financing of imports, especially consumer goods and cumulative process of debt have a positive effect on the level of indebtedness of Mali.

RAFFINOT and VENET (2001) found through a panel of 21 countries in sub-Saharan Africa for the period 1978-1997 that there is no significant casualty between trade openness and debt. They concluded that these results should not be generalized because of the specificity of economies in this part of Africa (exports mainly consisted of basic products and their quasi impossibility to borrow from international private donors).

YAPO (2002) in a study found that for Côte d'Ivoire over the period 1975-1999, the import/GDP ratio is not significant. In addition, he shows that the debt of Côte d'Ivoire is positively influenced by the deterioration of terms of trade and finds that the primary deficit is not significant.

AGBERE (2006) found that in Togo the debt ratio is positively affected by the population growth rate and the ratio of debt service to exports, negatively by the growth rate to actual GDP. According to his study, the fiscal balance ratio to GDP has not had a significant impact.

Studies conducted on a panel of countries such as the studies of Eichengreen and Portes (1986), Elbadawi and. al (1996), Patillo and al. (2004) and Clemens and al (2003), have all found that excessive debt has a negative effect on growth rate.

Building on the literature review and empirical tests or validations made by various studies on the determinants of external public debt, we can make the following assumptions H1 and H2 to meet the concern of this long essay which is an attempt to identify factors explaining public debt in Togo.

H1: The reported debt service to exports, the ratio of imports to GDP, exchange rate and the population positively explain the level of debt.

H2: The devaluation of the CFA, the break down of cooperation and GDP per capita negatively explain debt level.

5.1.1.2 Mode specification and series study

5.1.1.2.1 Model specification

The specification of an econometric model consists in translating into mathematic form the theory or economic phenomena examined. The specification requires the identification of variables and determining the form of the equation that connects them.

5.1.1.2.1.1 The model variables

In the light of economic theory and empirical studies; the variables selected for this study are:

The weight of Togo's external debt will be approximated by the ratio of outstanding debt at the period end in percentage of GDP (DTPIB).

·independent variable or explanatory variables likely to influence positively or negatively Togo's external debt

Import to GDP (MPIB) reflects the ratio of imports relating to the income generating capacity of the economy as a whole. They also express the level of output of foreign currencies relating to resource base. The expected sign is positive. OJO (1989) and YAPO (2002) achieved the same results.

The ratio between debt service and export (DSEX) reflects the level of debt service relating to the volume of income in foreign currencies available to the entire economy. The expected sign is positive. AJAYI (1991) and YAPO (2002) achieved the same results.

The population growth rate (POP) .Demographic pressure tends to encourage debt. The expected sign is positive OJO (1989) and YAPO (2002) came to same conclusions.

Either (GDPC), GDP per capita. Population growth is an important variable in the grounds of debt. Demographic pressure tends to encourage debt. Indeed, the population growth rate reduces the wealth of the nation (GDP per capita). The expected sign is negative.

(TCH), the exchange rate of CFA/Dollar (the exchange rate of the CFA franc against the dollar)

If the CFA franc is appreciated, the total external debt converted into dollar decreases. It is important to note that Togo's external debt is incurred in several currencies. The estimated sign is positive. KRUGMAN (1988) and N'DIAYE (1993) achieved the same results.

The dummy variable (DUM93) will assess the effect of the suspension of cooperation with key partners in the development of Togo. It took the value zero (0) before 1993 and one (1) after. The expected sign is negative.

The dummy variable (DUM94) that will capture the effect of the devaluation of the CFA franc against the French franc

It takes the value zero (0) before 1994 and one (1) after. The expected sign is positive.

5.1.1.2.1.2 Mathematical forms of the model

Our empirical model is based on that of OJO (1989) by the introduction of other variables. Suppose Y the explanatory variables to the dependent variable DTPIB.

The variable GDPH (GDP per capita) was expressed in naperian/natural logarithm in order to avoid problems related to the effects of magnitude and facilitate interpretations.

D(LDTPIB)_t = C₁*LDTPIB_(t-1) + C₂*D(LTCH)_t + C₃*LTCH_(t-1) + C₄*D(LMPIB)_t+ C₅*LMPIB_(t-1) +C₆*D(LPOP)_t+ C₇*LPOP_(t-1) C₈*D(LPIBH)_t + C₉*LPIBH_(t-1) + C₁₀*D(LDSEX)_t + C₁₁*LDSEX_(t-1) + C₁₂*DUM93 + C₁₃*DUM94 + C₀ + U_t

The coefficient C₁ is the coefficient of error correction (restoring force toward equilibrium / balance).

The coefficients C_2, C₄, C₆, C₈, C₁₀ represent the short-term dynamics.

The coefficients C₁C₃, C₅, C₇, C₉ et C₁₁ characterize the long-term equilibrium.

5.1.1.2.1.3 Estimate of the function of Togo's external debt

This study mainly uses statistical and econometric tools for the verification of assumptions. To this effect, the EVIEWSS software will be used. We will now proceed to the study of the stationarity and possible co-integration of the model variables. We then estimate by the method of the least ordinary squares the parameters of the model.

5.1.1.2.1.4 Source of study data

The data used in this study are annual data from the database of the Central Bank of West African States (BCEAO), the Directorate of Public Debt (DDP), the Directorate of Economy (DE) and the General Directorate of Statistics and National Accounts (DGSCN). These are time series covering the period from 1980 to 2008 (that is 29 observations). The quality and reliability of the estimates results are based on those data. Some variables will be measured by approximations to overcome the unavailability of data and to reduce the sizes at the same level as the dependent variable.

5.1.1.2.2 Studies of series

The study of the stationarity of the variables, if necessary, their order of integration, is done in order to ensure reliable estimates.

5.1.1.2.2.1 Study of the Stationarity of the series

The properties of time series of these data will be determined by the ADF test (Augmented Dickey-Fuller). Hypothesis testing is as follows:

The decision rule is to compare the test statistics ADF (ADF test statistics) to the critical value (critical value). If the ADF value is less than the critical value, then we accept the hypothesis of stationarity of the series.

ADF stationarity tests revealed that the variables LDTPIB, LDSEX, LMPIB, LTCH, LPCP and LPIBH are stationary in first differences. (Table 1, Appendix 6).

Given that all the series are not stationary there exists a possible co-integration between the integrated variables of the same order.

5.1.1.2.2.2 Johansen co-integration test

A macroeconomic stationary series may be the result of a combination of non-stationary variables, hence the importance of the co-integration analysis. Since all variables are not integrated in same order, there is a possible co-integration. Let us do Johansen co-integration test (Table 2, Appendices 6 and 7)

We accept the hypothesis of co-integration if LR is greater than CV. this means that if the co-integration rank is greater than or equal to one. We accept the hypothesis of co-integration.

Co-integration rank is 2; we accept the hypothesis of co-integration between the variables in the model at 5%.

5.1.1.2.2.3 Choice of technique

The existence of a co-integration relationship between the variables makes it possible to estimate en error correction model (ECM).

The ECM is used to determine the dynamics of short and long-term relationship between the variables.

We will make an estimate of the error correction model the way of Hendry (estimated in one step) by the ordinary least squares method. (OLS)

5.1.2 Estimation and model validation

5.1.2.1 Model estimation

We retain the estimation of Hendry's correction model as follows (estimated in one step):

Dependent Variable: D(LDTPIB)
Method: Least Squares
Date: 11/12/09 Time: 08:28
Sample (adjusted): 1981 2008
Included observations: 28 after adjustments


Variable	Coefficient	Std. Error	t-Statistic	Prob.


LDTPIB(-1)	- 0.978852	0.197330	- 4.960490	0.0002
D(LTCH)	0.558390	0.118836	4.698839	0.0003
LTCH(-1)	0.554834	0.150469	3.687379	0.0022
LMPIB(-1)	0.177077	0.073918	2.395604	0.0301
D(LMPIB)	0.297150	0.079564	3.734712	0.0020
D(LPOP)	- 1.019847	0.439043	- 2.322887	0.0347
LPOP(-1)	- 1.549542	0.251331	- 6.165357	0.0000
D(LPIBH)	- 0.780145	0.166637	- 4.681709	0.0003
LPIBH(-1)	- 0.591862	0.134018	- 4.416280	0.0005
D(LDSEX)	0.146342	0.031735	4.611330	0.0003
LDSEX(-1)	- 0.037082	0.024915	- 1.488334	0.1574
DUM94	0.686178	0.104388	6.573314	0.0000
C	9.373836	1.778812	5.269717	0.0001


R-squared	0.938316	Mean dependent var		- 0.022853
Adjusted R-squared	0.888968	S.D. dependent var		0.143416
S.E. of regression	0.047788	Akaike info criterion		- 2.939651
Sum squared resid	0.034256	Schwarz criterion		- 2.321128
Log likelihood	54.15512	F-statistic		19.01445
Durbin-Watson stat	2.035061	Prob(F-statistic)		0.000001

The coefficient associated with the resorting force is negative (-0.978852) and significantly different from zero. So there is a mechanism for error correction. The ECM is then valid.

Then we can perform all standard tests on this model. Then if its predictive validity is good, it can possibly be used for forecasting.

5.1.2.2 Model validation

To validate the results, we will proceed to the analysis of the statistical and econometric validities of the model and then test the predictive power of the model.

5.1.2.2.1 Statistical validity

5.1.2.2.1.1 Interpretation of the coefficient of determination

This means that 93.8316% of the fluctuations of the external public debt of Togo are explained by the model.

5.1.2.2.1.1.1 Test of significance

The model is globally significant because the value associated with the probability of Fisher (f-Statistic = 0.000001) is less than 0.05. The explanatory variables in this model generally have a significant effect on the country's debt.

The coefficients of the variables of the model are really significant except that of LDSEX Long-term variable.

5.1.2.2.2 Econometric validity

5.1.2.2.2.1 Test of multicollinearity

This test is to compare the coefficient of determination of the model estimated to the coefficient of simple correlation of the explanatory variables taken two by two. The simple correlation matrix of explanatory variables (see Table 3, Appendix 7) shows that all correlation coefficients between the explanatory variables of the model are actually lower than R². So the variables of the model used are not collinear.

5.1.2.2.2.2 Test of errors homoscedasticity

5.1.2.2.2.2.1 White testing

Probability values are all greater than 5% (Table n°4, Appendix 7) in this case the errors of the model are homoscedastic.

5.1.2.2.2.2.2 ARCH Test

The errors of the model are homoscedastic if the probabilities are greater than 5%.

In this case, the two possibilities are greater than 5%. The errors of the model are homoscedastic (table 5, Appendix 7);

5.1.2.2.2.2.3 Breusch - Godfirey Correlation test of errors

Both probabilities being greater than 5 % (Table 6, appendix 8), ECM errors are uncorrelated. Estimates obtained by OLS are optimal.

5.1.2.2.2.2.4 Ramsey specification test

ECM has lagged variables, instead of the Durbin - Watson test, it is rather that of Ramsey that will tell us if the model is well specified or not.

We accept HO if the probability is greater than 5⁰/₀. The values of the two probabilities are greater than 5⁰/₀ (Table7, Appendix 8); we accept HO; the model is well specified.

5.1.2.2.2.2.5 Jarque - Bera test

The assumption of normality of the errors terms is essential because it will classify the statistical distribution of the estimators. The assumptions of the normality test are:

In the threshold of 5%, we accept the hypothesis of normality as soon as the value of probability is greater than 0.05%.

The value of probability is 0.606636 (Figure 9, Appendix 4). The errors of the errors correction model thus follow a normal distribution.

5.1.2.2.2.2.6 Analysis of the Model's stability

5.1.2.2.2.2.6.1 Cusum stability test (Brown, Durbin, Ewans)

In this case, the curve is not outside the corridor (Figure 11, Appendix 5). Then, the model coefficients are stable. The estimated ECM is then structurally stable.

5.1.2.2.2.2.6.2 Cusum square test

This test can detect structural instabilities. In this case the curve is not outside the corridor (Figure11, Appendix 5); model coefficients are stable. We deduce that the ECM is regularly stable.

5.1.2.2.2.2.7 Evaluation of model predictive power

If U = 1 the prediction method is considered good (Figure12, Appendix5). It should be 0? U? 1

The result of evaluation of the predictive power of the model (Figure12, Appendix5) shows that:

MAPE = 0.570525% (Average Absolute Errors in percentage) and Criterion U= 0.003937 (close to zero) (See figure 12, Appendix7)

The different tests allow us to come to the conclusion of a correct specification of the model, its validity and predictive power. Let's turn now to the interpretation.

5.2 INTERPRETATION OF FINDINGS AND RECOMMENDATIONS OF ECONOMIC POLICIES

This section is devoted to explaining the results obtained in order to learn from Togo's debt and make suggestions to debt actors.

The pattern of Togo's debt seems to be well explained by the proposed model with a 95% confidence degree / level. We will try to emphasize in this part on the interpretation of model results, the implication of economic policies from the analysis of previous curves above and those arising from the interpretation of the model, and then recommendations will follow.

5.2.1 Interpretation of results

5.2.1.1 Results of estimations and interpretation of error correction coefficient

5.2.1.1.1 Estimation results

Dependent Variable: D(LDTPIB)
Method: Least Squares



Variable	Coefficient	Elasticités		Prob.

		Court terme	Long terme
LDTPIB(-1)	*- 0.978852*			0.0002
D(LTCH)	0.558390	0.558390***		0.0003
LTCH(-1)	0.554834		0.5668***	0.0022
LMPIB(-1)	0.177077		0.1809**	0.0301
D(LMPIB)	0.297150	0.297150***		0.0020
D(LPOP)	- 1.019847	-1.019847**		0.0347
LPOP(-1)	- 1.549542		- 1.5830***	0.0000
D(LPIBH)	- 0.780145	-0.780145***		0.0003
LPIBH(-1)	- 0.591862		- 0.6046***	0.0005
D(LDSEX)	0.146342	0.146342***		0.0003
LDSEX(-1)	- 0.037082			0.1574
DUM94	0.686178***			0.0000
C	9.373836			0.0001
R-squared	0.938316	n		29

Durbin-Watson stat	2.035061	Prob(F-statistic)		0.000001

D(LDTPIB) = -0.979*LDTPIB(-1) + 0.558*D(LTCH) + 0.555*LTCH(-1) + 0.177*LMPIB(-1)

- 0.592*LPIBH(-1) + 0.146*D(LDSEX) - 0.037*LDSEX(-1) + 0.686*DUM94 + 9.374 (-4.42) (4.61) (-1.49) (6.57) (5.26)

5.2.1.1.2 Interpretation of the Error correction model

The Coefficient associated with the restoring force is negative (-0.978852) and significantly different from zero at statistic threshold of 5%. Its probability is equal to 0.0002 and less than 0.05. There is therefore a mechanism for error correction.

In the long -term, imbalances between the debt ratios, the exchange rate of the CFA expressed in dollars, GDP per capita, population, imports relating to GDP and the debt service to exports ratio offset so that their series have similar trends.

The coefficient - 0.978852 reflects the speed at which the imbalance between the desired and actual levels of debt is absorbed in the year following the shock. This means that we can happen to adjust 97.8852% of the imbalance between the actual and desired levels of the external indebtedness of Togo.

Thus, the shocks impacts on the external debt of Togo are corrected at 97.8852% by the «feed-back» effect. In other words, a shock observed during a year is completely absorbed after one year and one month (1/0.978852 = 1.0216049 years).

5.2.1.2 Interpretation of elasticity

5.2.1.2.1 Interpretation of long-term elasticity or semi-elasticity

The results show that only the variables: exchange rate, GDP per capita and devaluation are crucial in explaining Togo's debt. It appears the following observations:

·The exchange rate is positively correlated with Togo's debt. Togo's external debt is in foreign currencies. The exchange rate affects significantly the country's external debt.

·The elasticity of long-term debt relating to exchange rates (CFA/US Dollar) LTCH is 0.5668.In the long term, a 10% appreciation of the average exchange rate of CFA/US dollar reduces the debt service. Empirically, N'Diaye (1993) reached the same conclusion in a model of debt in Senegal.

·The elasticity of imports / GDP ratio is 0.1809.In other words a 10% reduction in imports would reduce the level of debt by 1.809% in the long term. This result indicates that any policy to reduce debt including a reduction of imports would be effective.

·In the long term, a 10% increase of the population would lead to a reduction of the level of debt by 15.830%. This can be explained by the breakdown of cooperation with EU. In fact, during that period, Togo has not received new loans from its EU partners.

·The elasticity of long-term debt relating to GDP per capita is -0.6046. GDP per capita (GDPPC)/ (PIBH) is negatively correlated with Togo's debt. In the long term, while GDP per capita increases by 10%, then external debt to GDP ratio will know any thing equal any way, a decrease of 6.046%. A strong GDP growth would be desirable to reduce significantly the level of the country's debt.

·Demographic pressure tends to encourage a country's indebtedness. The State is obliged to borrow to strengthen its financial capacity to invest in sectors such as education, health, transport in order to preserve social peace for an increasingly young population is demanding.

·However, most studies have shown that there is no impact between population growth and economy growth. Barro (1990) emphasized the exogenous feature of the population variable in the models of growth integrated in the models of debt sustainability .This is justified by the absence of a significant relationship between accumulation and population growth.

·The dummy variable DUM94 that captures the effect related the devaluation of the CFA franc against the French franc has a positive coefficient (0.686178).

Devaluation significantly influences Togo's external debt at 5%.This result means that the devaluation has increased the country's external debt. It is important to recall that Togo's external debt is contracted in foreign currencies.

5.2.1.2.2 Interpretation of short-term elasticity

· The elasticity of short-term debt to GDP ratio compared to the exchange rate is 0.558390. Thus, in the short-term if the CFA franc deprecates against the US dollar by 10%, then the total external debt measured in US dollar related to GDP will increase by 5.58390%.

· A reduction in imports by 1% leads to a decrease in the level of indebtedness by 0.297150% in the short-term. In other words, a reduction of 10% in imposts would reduce the level of debt by 2.972% in the short. This result indicates that any policy to reduce debt including a reduction in imports would be efficient.

· In the short-term an increase of 10% of the population leads to a reduction in the level of indebtedness by 10.1984%. This can be explained by the breakdown of cooperation with the EU which has caused Togo not to receive any new loans.

· In the short-term, an increase in GDP per capita of 10% will cause a decrease in the level of Togo's debt by 7.80145%. The level of GDP per capita is negatively correlated with the debt of Togo. Demographic pressure tends to encourage the government debt to finance its expenses in education, health and other, or to cope with natural disasters (fire, flood and earthquake). On the other hand, a relatively high economic growth reduces opportunities of debt, that is to say that macroeconomic performances tend to limit, to some extent, the constraints of external capital requirements.

5.2.2 ECONOMIC POLICY RECOMMENDATIONS

Analysis of the results of our model shows that the debt has not helped the economic takeoff of Togo. However, external debt is not the only obstacle to the country's economic development. The challenge of improving the living conditions of its population remains unchanged. That is why the economic policy recommendations set out below aim at creating not only a conducive environment to stimulate growth, but also and above all, laying the foundation of debt sustainability, and allowing economic development. It is, among other things to:

5.2.2.1 Framework of debt

5.2.2.1.1 Terms of debt management strategy

Ø Prioritize highly concessional financing. A sound and efficient management would minimize the country's exposure to risk. This will enable debt restructuring in order to bring it back to a sustainable level. Management must especially take into account the use of the debt. The authorities should therefore direct loans to the productive and social investments. Also, it would be wise appeal to market instruments to strengthen the deepening of the financial market. In this respect, good programming of the issuance of Treasury^14(*) bonds would contribute to enhancing the efficiency of financial markets.

5.2.2.1.1.1 Regarding the choice of creditors

Ø It would be desirable to prioritize debt from Asian countries (China, India, Japan and Arab countries) to transfer technology and more concessional loans.

Ø The choice of a country like China is motivated by the fact that the Chinese are accustomed to implementing themselves the projects and the works that they finance. Let us remind you that the agreement with the Chinese is often not binding and their achievements are less expensive. Also, it would be imperative that the government negotiate before signing a loan agreement, a transfer of knowledge and technology.

5.2.2.2 Economic development framework

5.2.2.2.1 In the field of economic growth

Economic growth is a precondition for a policy of reducing the debt burden. The financial health of the Togolese government would be greatly improved by an increase in GDP growth. A sound political action could encourage investment by creating a favorable environment. At the level of strategies and actions to implement in order to stimulate the country's economic growth:

Ø The implementation of macroeconomic and structural policies including trade, fiscal and sectorial policies contribute to a stable environment for economic activity. These economic reforms affect more incentives to invest. It is recognized that the countries that undertake sound macroeconomic policies and that have economic structures that support the functioning of the market can experience a relatively flexible and stable economic growth.

Ø The growth of Gross Domestic Product (GDP) per capita is a way to measure the economic performance of a country. This ratio includes the demographic dimension and represents the «net gain» of growth: Its increase results in an improved living standard. Togo can do belter, especially by restoring the business climate which would increase private investment and therefore GDP growth.

Ø The relationship between population growth and economic development through the impact it has on the public debt are obvious if we refer to our econometric model. For several decades Togo seems to have borrowed money to meet the demands of public funds for education, health and even to feed its children because the relationship between imports of consumer goods and the debt is also proved by the model. A reduction in the population growth is expected to improve the economic prospects of development of Togo and hence its ability to improve the living conditions of its citizens. This belief that is not universally accepted, is based on the reasoning that lower fertility will reduce the number and proportion of children aged 0-4 years and hence the demand for public services fund education and health. And because of the decline in fertility rates, the resources available per capita for education and health services increase, even in the absence of an increase in funds allocated by the Togolese state for these services. The threat that population growth poses for Togo is twofold. Firstly at the macro level by increasing public debt second but even more because the rate of population growth will be associated with a current rate of spending and therefore higher consumption and low investment in building human and physical capital with the risk of pressure on the environment and humain.il capital is generally accepted that regulation of fertility and decline in mortality due to better health, better education and better opportunities for employment, encourage families to save and invest. Togo must therefore adopt a policy of reducing the rate of population growth to reduce public debt and paved the way for economic development

5.2.2.2.2 In business

Ø Encourage grain production in order to reduce imports that are revealed through this study as one of the determinants of the country's debt. To achieve this, the State must improve agricultural productivity through the implementation of advanced farming techniques, irrigation projects on a small scale and reduce taxes on producers so that the workforce can benefit from an improved terms of trade.

Ø The revenues from imports of goods and services should be the most effective factor in increasing the country's capacity to meet its commitments and pay its debts. To promote exports of stable commodity, production must meet local demand and be able to supply sufficient export availably.

Ø Importation is also part of the causes of the public debt of Togo. This call for a real industrialization policy in order to offer to Togolese some of the goods imported and therefore reduce the deficit of the balance of payment .

Like any scientific work our study could have a limit. In fact the data are not from the same source, which may introduce bias in the analysis and therefore in the recommendations on these analyses.

This analysis is a rational analysis made on the basis of a mathematic model which in itself is not enough to explain the Togolese debt. Historian and foreign partners such as the World Bank have revealed that some of the borrowings were done to finance unnecessary investments with the intention to commit fraud during the execution phase of the investments at the advantage of some of the local politician and foreign investors. Togo has for example finance an oil refinery which never worked and without having any oil resource. There is also a public opinion that the high debt level of African countries was engineered by occidental countries in order to control economically this young and fragile countries that became independents in the sixties and to latter imposed structural adjustment programs with the final aim to open their markets to multinational countries and open their economies to a liberalization for which they are not prepared. All this side explanations of the level of public debt of African countries are not explored in the context of the current dissertation while it might make sense to add them . Of course, the difficulty to turn this kind of argument into a mathematical model has contributed to their omission in the current dissertation.

As analyst I am for the opinion that the majority of the debt of African countries has been contracted by regimes that were imposed to the Africans in the context of the cold war by the west and that the debt is not justified or at least does not have legitimacy. This could of course have an influence on some of my recommendations, however I have tried to be as neutral as possible in my conclusions and recommendations.

The overall objective is to identify the factors explaining the evolution of the public debt of Togo. Our studies have revealed the fragility of the Togolese economy and debt problems related to low repayment capacity and debt accumulation. Through an econometric study with an error correction model, we have reached the following conclusions:

Ø The devaluation of the CFA franc in 1994 was a major event that affected the country's public debt; the country's imports also proved determinant in the country's public debt.

The descriptive analysis shows that the country enjoys little of its trade openness. Togo's debt is 60% external debt.

Following the results of our study we can say that the level of indebtedness of the country is a matter of public finance, debt management and poor economic policy orientations. Therefore, an effort to improve the growth rate of GDP would be a solution. Finally, the substitution of certain products in order to reduce imports is essential for reducing the debt. All these efforts must be followed by a consolidation of public finances with a view to improving the fiscal balance.

With the assets available to Togo, a sound and efficient management, an institutional capacity building would enable the country to get closer in the coming years to the path of economic takeoff. The Government of Togo must develop a rational, clear and unambiguous terms of public debt. The reduction of the debt with requires time and especially temporal coherence that only a broad consensus with the population will achieve. External debt is not the only obstacle to the country economic development. Given the demographic changes ahead, the challenge of improving the living conditions of the population remains whole.

Beyond Togo debt is an essential part of the budget of the economy of most African countries. The debt service is for example the years 1992-1997, 35% of the budget of Cameroon and the Ivory Coast, 40% of the Kenya and Zambia, 46% of that of Tanzania (in the same time the share of social services is less than 15% of the budget, 4% in Cameroon). An essential part of this external debt consists of the so-called multilateral debt that is to say to the international financial institutions where representation of these countries has virtually no weight. According to the Committee for the Cancellation of Third World debt, the debt "is the result of specific geopolitical choice». It now appears on the geopolitical map as a powerful mechanism of subordination of the South because as soon as a country is forced to stop his payments, the International Monetary Fund (IMF) agreed to lend the money to a high rate if the country concerned agrees to conduct the policy decided by its experts: the economic policy of the debtor State came under control of the IMF. The recommended measures are included in a Structural Adjustment Program (SAP), which is the same liberal scheme: elimination of subsidies on products and services of necessity : bread, rice, milk, sugar, fuel ..., fiscal austerity and reduced expenses generally drastic drop in social spending considered as "non-productive" (health, education, subsidies to commodities) devaluation of the local currency, high interest rates to attract foreign capital with high pay; agricultural production entire export-oriented (coffee, cotton, cocoa, peanuts, tea, etc..) to earn foreign exchange, thus reducing deforestation and food crops to gain new areas, total opening of markets by removing trade barriers; liberalization of the economy, including surrender of control of capital movements and the removal of exchange controls, taxation exacerbating inequality with the principle of value added tax (VAT) and the preservation of capital income; massive privatization of public companies, so a withdrawal of the state of the productive sectors

June 10, 2009, two associations French and Belgian claim in a report on the "hedge funds" the establishment of a true international debt tribunal. These associations emphasize that these hedge funds "redeem the debts of the poor countries at an extremely low price in order to force them through the courts to pay the full price, raking in huge gains on the back of the people of Congo, Zambia, Peru, Argentina and Nicaragua.

They point to the responsibility of the rich countries, especially considering that "the French or American justices have routinely give reason to these hedge funds against poor countries" and that "the money France and the rich countries have spent on debt relief is confiscated by private funds instead of finance social spending, as announced.

There is therefore a real need to revise the mechanism of public debt for south countries in order to allow their development and enable them to play a more important role in the globalization. This is a matter of international justice which should be considered by the international community as important as or even more than the cases that are having all the attention of the international penal court.

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* ¹ Marshall Plan is a comprehensive program of financial aid offered by the U.S. for rebuilding the allied countries. This program leads to a substantial contribution of capital in the form of loans to the latter

* ⁴ DEDLOCk C. and al, External/ Foreign debt of developing countries : Unlimited renegotiation, 2001, P.9

* ⁶ KAMARA Mama Pierre and N4DIAYE Pierre, Debt Management Curriculum, COFEB ,2009

* ⁷ Development funding Office, United Nations economic and social matters department, strategic considerations in the management of public debt for sustainable development / document of orientations for multi-stakeholder dialogue, October 2004, p.3

* ¹⁴ Treasury bonds: Short term securities issued by the government, usually sold at a discount instead of earning

interest with a maturity of at least one month.
bonds: medium and long-term instruments issued at par and with interest payable annually or semi-