Dr. Yassir M. Al Obaid
In the beginning, it must be clarified what the Central Bank of Sudan opening an account with the US Federal Bank means, and what is the relationship of the US Federal Reserve with the World Bank and the International Monetary Fund, and what do all of them have to do with the bridge loan, and what does the bridge loan, amounting $ 1.2 billion, that was granted to Sudan to pay part of its arrears to the World Bank signify.
The bridge loan worked as a way to activate the U.S Federal Reserve account, which had been frozen for more than two decades, to pave the way to exempt Sudan’s official debts, amounting to about 57 billion dollars, while the total external debt ranges from 60 to 70 billion dollars.
This would then allow Sudan to benefit from the Heavily Indebted Poor Countries (HIPC) initiative, which the Pace conference envisages to be held mid-May.
The statement of the Central Bank of Sudan coincided with statements that the Central Bank possesses a foreign exchange reserve sufficient to meet the basic needs of urgent strategic commodities.
This coincided with the initial agreement to open an account with the US Federal Bank as the first efforts to restore correspondent relations with the Federal Reserve.
The Bank of Sudan had previously succeeded in making payments in favor of the International Monetary Fund to implement direct payments through a correspondent in London (BACB) to the American Federal Bank in New York, after the lifting of the American ban and removing Sudan from the list of countries sponsoring terrorism, which paved the way for Sudan opening a bank account at the US Federal Reserve.
The French president committed to pay a grant to Sudan in the range of 1.2 billion as a bridge loan to pay the last part of Sudan’s arrears to the World Bank, while more than six member states of the Paris Conference committed themselves to relief their debts on Sudan.
France is Sudan’s second biggest bilateral creditor after Kuwait, according to IMF data, and is due to host an economic conference on Sudan next June.
The United States and the IMF urged other governments to join in the effort to provide debt relief to crisis-hit Sudan.
The US Treasury held a roundtable with 20 countries to advance Sudan’s efforts to secure and clear $50 billion in foreign debt under the HIPC initiative.
Sudan’s civilian-led transitional government has made strides in implementing macroeconomic reforms
In late March, Washington approved more than $1 billion in bridge financing to Sudan to help clear arrears at the World Bank to allow the country to qualify for the HIPC initiative.
The bridge loan was signed within the memorandum of understanding between Sudan and the United States of America and how it helps in Sudan’s path towards easing the burden of external debts to get rid of a legacy that has crippled Sudan and deprived it of the international financing necessary for development.
This legacy has also deprived it of the influx of foreign direct investments, and others, which is a legacy of about $ 57 billion in debt.
Regrettably, 85% of those debts are arrears of contractual and penal interest, and it is expected that they will touch the $ 60 billion.
Economists define a bridge loan as a temporary loan that provides temporary financing when the borrower needs additional time to obtain permanent financing.
This type of financing allows the borrower to meet current obligations to provide cash flow, and these loans “bridge the gap” of time associated with the need for financing.
On the issue of foreign debt, it is one of the ways in which our country can fulfill the technical conditions for exempting external debt, within the framework of the HIPC initiative.
The government is looking for a creditor with strong financial capabilities, such as America or Norway and others, from who it would obtains a bridge loan.
The United States has already pledged to pay one billion dollars.
This leaves Sudan with about 1.6 billion dollars that must be obtained from friends to pay off the debts of other sovereign institutions, namely the Fund and the African Development Bank.
The total arrears as a sovereign debt to the fund are about $ 2.6 billion, and they cannot be forgiven because they are sovereign debts. After these sums are made available, they are delivered to the aforementioned international bodies, and their debts and arrears in Sudan will be amortized.
Then the Fund, the World Bank and the African Development Bank, after confirming the payment process, will return the same amounts that will be paid to the donor country of the disk within a period of time not exceeding 72 hours, and therefore these institutions can schedule the debt on Sudan. Thus, Sudan will then be considered to have no arrears with those sovereign institutions.
The transitional government can reach creditors who can forgive or reduce the debt within the framework of the HIPC, and because it will have paid off the sovereign debt, as a necessary and sufficient condition for negotiation and extinguishing the non-sovereign debt, such as the debt of the Paris Club countries.
Hence the importance of the bridge loan that lies in that it qualifies you to fulfill the most important conditions for debt relief and then reach the point of decision-making after ensuring that the government adheres to the reform program according to the fund’s vision through the program it sets.
An example of this is that as a country whose status is similar to that of Sudan in terms of the importance of the bridge loan, Zambia obtained it after it recorded a strong performance in the implementation of the fund program, and obtained a bridge loan from Britain according to which it paid its debts owed to the fund and was then able to process its debts with creditors, what happens next is bound with Sudan’s arrival at the decision point.
Sudan will have access to the necessary financing and aid to carry out the development process, through obtaining concessional loans from various international financial institutions and funds, including the International Monetary Fund, the World Bank, the African Development Bank, and the US Federal Reserve.
According to the data of the US Federal Reserve reports, it carries out five main tasks; foremost of which is managing the state’s monetary policy to promote maximum employment, stable prices, and moderate interest rates in the long term in the United States.
It works to stabilize the financial system, and seeks to reduce and contain systemic risks through active surveillance and participation in the United States and abroad, as well as supporting the integrity of individual financial institutions and monitoring their impact on the financial system as a whole.
This is in addition to enhancing the safety and efficiency of the payment and settlement system through services provided to the banking industry and the US government that facilitate transactions and payments in US dollars.
Finally, the Council undertakes consumer protection and community development activities through supervision, research and analysis of consumer issues and trends, societal economic development activities, and consumer laws and regulations administration.
The Weapon of Interest Rates and World Markets
The US Federal Reserve is one of the most influential financial institutions in the global economy, especially when using the interest rate weapon in managing inflation and growth.
Any movement in interest rates, in turn, affects the exchange rate of the US dollar, which means an impact on the entire global economy, as the decision affects the ability of all countries to issue bonds in the US currency, as well as its importers on export capabilities, especially since more than 80% of foreign exchange exchanges in the world are done through the dollar.
On the other hand, the Federal Reserve played a pivotal role in containing global crises, most notably in the modern era; the global financial crisis in 2008, which arose as a result of the expansion of banks in mortgage activity and providing large facilities to customers without being matched by adequate guarantees.
At the time, the Federal Reserve intervened to implement a $700 billion financial rescue plan to support banks and financial institutions suffering from an increase in doubtful debts.
During the crisis, the US Federal Reserve saved the insurance company AIG by providing credit facilities in the amount of $85 billion, which later rose to $180 billion in return for owning 80% of its shares.
Meanwhile, American financial institutions contributed to supporting the economy, such as J.P. Morgan, which succeeded in buying Bear Stearns investment bank –which was suffering heavy losses– as well as the acquisition of Washington Michigan, one of the largest savings institutions.
Now, the Federal Reserve began managing the repercussions of Corona on the US economy, as it made a series of interest rate cuts until they fell to between 0.25% and zero in order to reduce the cost of financing and stimulate the economy, as well as implementing a $4 trillion financing package plan to support the economy.
The cut in interest rates temporarily eased the tension that took place between the presidency of the Fed, due to the Fed’s refusal at the time to cut interest rates, which were moving above 2%.
However, the crisis has returned again these days, as the Federal Reserve expected the US economy to contract by 6.5% this year.
This contradicted the expectations of the US administration, but the Federal Reserve pledged to make every effort to restore the US labor market to the strength it was before the Corona virus.
Therefore, the question that begs itself is: will the federation win in the battle of Corona so that it continues as a leader in managing international crises?