Debt strategy needs overhaul – IFS

The Institute for Studies (IFS), an economic policy think-tank, wants government’s debt management strategy revamped if it is to survive an imminent debt ‘meltdown’ as the country’s total public debt stock nears GH¢100billion, about 70 percent of GDP.

Executive Director of IFS Prof. Newman Kusi, delivering a lecture on the topic ‘Public Debt and Sustainability: Whither Ghana?’ at the University of Ghana last week, said the country’s fast-rising public debt stock requires urgent remedies.

The provisional public debt stock as at September 2015 was GH¢92.2billion, which was equivalent to 69.1 percent of GDP. The huge surge in the country’s public debt stock in just one decade is attributed to the large fiscal deficits registered over the years, which were financed by funds borrowed from both domestic and foreign sources.

“Given the high level of public debt, there is an urgent need for a well-grounded fiscal framework to anchor fiscal policy and guide it toward the achievement of medium-term objectives. Credible policies to restore debt sustainability, macroeconomic stability, and a return to high growth and job-creation are needed. Otherwise, the country will very soon be in a debt meltdown like Greece.

“As the IMF has indicated, given the high level of public debt and financing constraints, fiscal adjustment will need to be strengthened in 2016. The real challenge, though, is whether government will be able to demonstrate fiscal prudence in the run-up to the 2016 elections,” Prof. Newman Kusi said.

The lecture by the IFS Executive Director was part of a series of lectures organised by the Economy of Ghana Network of the Institute of Statistical, Social and Economic Research, University of Ghana.

According to Prof. Kusi, not only has the total public debt stock assumed alarming proportions but the composition of the debt has also become “a major source of risk, trapping the authorities in a vicious circle of short maturity, high risk currency depreciation-high debt levels.

“This underscores the call on government to slow down borrowing, especially borrowing from foreign sources, unless the borrowed funds are used to finance projects that can generate funds within a reasonable time period to pay off the debt.”

According to him, such foreign-financed projects should also seek to strengthen the economy’s structure by broadening the production base, reduce its over-dependence on a few primary and unprocessed export commodities, support the manufacturing sector, and reduce the high import-dependence.

Gov’t debt strategy

Cabinet in June 2015 as part of measures to safeguard government’s overarching goal for debt and fiscal sustainability developed and approved a Medium-Term Debt Management Strategy. The new strategy included a plan to deepen the domestic debt market and contribute to reducing refinancing and exchange rate risks, while securing a more stable source of financing over the medium term.

The government had also planned to strengthen risk management practices by developing an operational framework for building cash buffers, strengthening the management of on-lending portfolios, and reducing its exposure to contingent liabilities by minimising the use of sovereign guarantees.

But all of these measures had contributed little to savaging the country’s debt situation and Prof. Kusi said maintaining Ghana’s debt sustainability will largely depend on a multitude of other factors that include not only a strong and sustained future economic growth but also appropriate borrowing conditions, terms of trade, foreign exchange and interest rate risks, among others.

“In the light of these considerations, the government needs to pay particular attention to the following issues in its attempts at maintaining debt sustainability: formulate and implement prudent, effective and sound debt management strategy; balance the choice of financing sources and instruments; use borrowed funds to invest in projects that have a high private or social return; engage in responsible borrowing; and formulate an international debt workout mechanism,’ he concluded.