Government offers sovereign guarantee for businesses

The government has offered to provide sovereign guarantees for a fee to cover loans taken by state-owned enterprises and private companies.

According to new regulations enacted by the finance ministry last week, sovereign guarantees will only be issued for loans taken with an interest rate below four percent to finance tourism-related projects, social housing projects that meet the government’s criteria, and high-priority development projects.

“The main purpose of this regulation is to ensure that guarantees issued by the state are provided transparently, in an equal manner, and in accordance with sound principles,” reads the rules.

The government will charge a one-time fee of one percent of the guaranteed loan amount as well as an annual administrative fee of 0.25 percent.

The company must also cover the cost of the evaluation process, which will be carried out by a party designated by the finance ministry or an independent audit firm.

If the company defaults on the loan, the rules say the sovereign guarantee will be used as a last resort after selling off mortgaged assets. The company will be required to repay the amount after the government settles the loan.

The finance minister is tasked with monitoring repayment of the guaranteed loan. Both the company and the lending bank must inform the finance ministry every four months of the remaining amount and provide details of the loan servicing arrangement.

The company must also update the ministry every four months on the project’s progress. A party designated by the ministry will also make site visits at least twice a year for inspection.

The rules meanwhile prohibit the company from seeking further loans, mortgaging company securities, or transferring shares.

The public finance law does not require parliamentary approval for issuing sovereign guarantees. However, documents must be submitted to the parliament’s public accounts committee.

The government has previously provided sovereign guarantees for foreign companies. Most recently, a Turkish company contracted to build 5,000 housing units in the capital’s suburb Hulhumalé was provided with a sovereign guarantee worth US$328 million.

According to the new rules, the finance ministry will determine a maximum amount that the government could offer sovereign guarantees for during the year. Other information about issuing sovereign guarantees will also published annually.