Eurobond letdown bad for economy?

Tue, 9 Aug 2016 Source: B&FT

Ghana received a lukewarm response from investors recently in its bid to issue a fifth Eurobond, which forced the Finance Ministry to withdraw the sale.

The situation highlighted investors’ sentiments about the health of the Ghanaian economy which appears to be in a debt trap.

The Finance Ministry said that, “the government will continue to build on this dialog with international investors while monitoring the markets and the IMF Board process with respect to the Third Review of the Program and will issue new notes at the optional time and the right conditions.”

Last week turned out to be a very tough one for the Finance Ministry, as the odds got stacked against us when we tried to raise debt on the international market.

The dramatic slowdown in economic growth, combined with low commodity prices and the concern over government spending in an election year, have meant that, it is a difficult time to invest in Ghana.

An economics school of thought holds the view that, the Eurobond is a friendly money and its influx in an economy is merely a short term arrangement whose effect will fade if underlying fundamentals are not fixed. A healthy economy allows for availability of cheaper credit, thus increasing the influx of foreign investment however, when this trend fails to run their course Eurobond becomes expensive.

Maybe we need to accept that the global market has picked up the fact that Ghana’s economy is not doing better than when some previous bonds were issued. Investors know that Ghana is building foreign currency reserves by borrowing. Our high borrowing cost suggests that the international investors do not believe in the IMF reports on the health of Ghana’s economy.

Many have said the overall direction of the economic policy piling up our debt stock is always likely to lead to troubling consequences in the times ahead. Hence, they want government to be bullish in tackling fundamental economic issues and also make tough fiscal choices.

Analysts have said living on borrowing is a dangerous policy for the country and for the government. Our game plan looks simple: borrow for short-term measures and keep the ball rolling till it hits a snag to restart with another borrowing. Living on the edge is a seeming mantra of the government.

Ghana’s debt is reaching worrisome levels where any further debt accumulation and monies borrowed resulting in productivity benefits can push the country down a vicious debt trap.

We all know that many of the loans received in recent years have been used to simply pay interest and principal debt. Our next generation would be the ones to face this dire consequence of recycling debt payments.

The question is: why is Ghana not generating means to raise enough revenue as a state? Why hoes Ghana have to borrow more to always pay maturing debt?

We expect that the chunk of monies received must be spent on cheap production, jobs, education, stable supply of electricity, fighting corruption, expansion of irrigation systems and building of state factories.

The good direction of the economy would play a role in determining future borrowing costs, a reason government must seek to address structural bottlenecks. If government thinks the Eurobond is the way forward, then it must work hard to invigorate the economy to woo investors at any given time.

This means whenever the Finance Ministry goes on a roadshow to launch a bond, Ghana must go to the market on the backdrop of a good track record of economic management. Investors are always appreciative of progress made in stabilizing an economy with reforms carried out in critical sectors like energy, privatization, tax administration and investment climate.

In reality, we know government’s commitment to good economic growth but when investors show such lukewarm response it also highlights government’s lack of commitment to structural reforms hampering economic growth.

Source: B&FT
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