Public debt to hit Gh¢115 billion

Ghana’s total public debt is set to skyrocket further with the GH¢25 billion government intends to raise through bonds and Treasury-Bills from both investors and some commercial banks in the second half of 2015.

According to experts, this spiral growth, if it continues without a corresponding generation of financial assets and revenue growth, would make the country debt unsustainable and might have the debt stock hitting over GH¢100 billion by December 2015.

The Ministry of Finance is hoping to use the funds to pay debts that are maturing and finance certain infrastructure projects outlined in the 2015 budget.

Dr Raziel Obeng-Okon, an investment advisor and a lecturer at the Ghana Institute of Management and Public Administration (GIMPA), says even though the amount would help restructure government’s growing debt, it was not ideal borrowing to settle government debts because it usually does not grow the economy.

“It is a signal that earlier amounts borrowed did not go into projects that could be self-financing or help in growing the GDP. Too much of the earlier borrowings were used to fund the administrative machinery of government including high interest payments on the debt,” he notes.

He maintains that the surge in the country’s debt stock could have serious repercussions on investor confidence, adding that it could result in the country being downgraded by credit-rating agencies which would consequently impact negatively on investor confidence.

“A high debt-to-GDP ratio without corresponding revenue generation may lead to a lower capacity to borrow and, therefore, a lower grade from credit-rating agencies. A lower credit rating could reduce the appetite of foreign investors who seek higher return for their investments,” he explains.

The investment advisor laments that the current refinancing of debt with borrowed funds cannot be sustainable in the medium- to long-term adding that “If Ghana is eventually unable to pay its debt, it could cause a panic in the domestic and international markets.”

According to Dr Godfred Bokpin, Economist and Head of Finance Department at the University of Ghana Business School, “One has to be concerned because where the debt stock has reached presents certain challenges especially in our efforts to stabilise the debt-to-GDP ratio or to get to debt-sustainability level.”

He warns that the rate of the rise prompts fears that the International Monetary Fund (IMF) could set limits on further government borrowing.

“The Fund to a large extent will be imposing some limits on further borrowing; going forward, they are going to tie our hands as to how much we can borrow,” he says.

Government had planned for the first half of this year to raise an amount of GH¢25 billion – collectively bringing to GH¢50 billion the amount it intends to raise for the whole of 2015.

The country’s total debt stock is said to stand at GH¢90 billion currently. However, official figures as at May 2015 shows that it grew by GH¢13.4 billion from the GH¢76.1 billion recorded in December 2014 to GH¢89.5 billion - representing some 67.1 per cent of GDP.

It is also important to note that Ghana has since December 2014 crossed the crucial 60 per cent threshold of the debt-to-GDP ratio.

A rise in a country’s debt stock is usually as a result of an accumulation of over-spending on the fiscal side, unmatched by revenue generating activities.

However, in developing countries like Ghana, the rise could also be attributed to external net disbursements for infrastructure projects, net domestic issuance, high recurrent expenditure, corruption, etc.

It would be important for the Bank of Ghana to make known the financial assets matching up the huge and growing public debt of Ghana. Clearly, Ghana’s revenue base is too small to warrant this growing public debt stock.

Also worrying is the high interest payments as a percentage of total revenue. The 2015 budget shows that out of the budgeted GH¢30.86 billion total domestic revenue, as much as GH¢9.58 billion will go to settle interest on loans - representing about 31 per cent of total domestic revenue.

“The budget for interest payment of GH¢9.58billion is more than what it could possibly raise from total external loans and grants of GH¢6.75 billion and GH¢1.55 billion respectively. All the loans and grants anticipated (GH¢8.30 billion) will only go to service the interest payments,” Dr Obeng-Okon grieves.

This is a signal that government is borrowing to refinance interest repayments, and this is not sustainable in the medium- to long-term.

“As it stands now, government cannot immediately get out of this debt trap because maturing obligations cannot be paid out of its relatively low revenue base. Restructuring of the debt from short- to long-term may bring some respite but can only be sustainable if the short term relief is combined with strong fiscal consolidation,” the investment advisor states.

He argues that while swapping old debt with new ones, it is important that any surplus of the new debt, over and above the old debt, go into projects that can pay for itself.

Dr Obeng-Okon says if that is not done, the restructuring would only lead to growing the debt without a corresponding growth in productivity or GDP leading to a worsening situation.

If a country can continue to pay interest on its debt without refinancing or harming economic growth, it is generally considered to be sustainable, and the country may be referred to as a stable country.

However, analyses of Ghana’s revenue base as a percentage of GDP and the interest payment as a percentage of revenue show that the current level of about 67.1 per cent public debt-to-GDP ratio (GH¢89.5 billion) may not be sustainable.

Given Ghana’s relatively low levels of revenues vis-à-vis high and rising expenditure, the high debt-to-GDP ratio may make it more difficult for Ghana in the medium-term to pay its debts and this may lead creditors seeking higher interest rates when lending. It may also cause a panic in the domestic and international markets and credit rating agencies may reduce Ghana’s ranking further.