Ghana’s public debt exceeds sustainability threshold

As widely expected Ghana’s public debt has now passed the generally accepted sustainability threshold of 70 percent of Gross Domestic Product, the GH¢273.8 billion in total debt by the end of September translating to 71.0 percent of GDP.

This is up from GH¢209.1 million a year previously by which time the debt to GDP ratio at 59.8 percent was still well within the sustainability threshold.

The sharp increase in the public debt in 2020 – it rose by GH¢55.6 billion during the first nine months of this year alone – is primarily due to the cost of successfully navigating the outbreak and viral spread of the COVID-19 pandemic.

During that period government’s revenues were constrained to 9.4 per cent of GDP while its expenditures were driven up to 18.4 percent of GDP by the inevitable increases in health related costs, social interventions to protect the populace from the adverse effects of the public policy responses introduced to curb the spread of the pandemic and spending on business stimulus to avert the economy from sliding into recession.

This left government with a 9.0 percent of GDP fiscal deficit for the first nine months of 2020 as it strives to keep the full year deficit to within the revised target of 11.8 percent.

This will be a difficult task as public spending during the last quarter of the year is being bloated by the genuine cost of holding general elections and the more dubious cost of pandering to the demands of various interest groups within the electorate.

The most vocal such group has been depositors and investors affected by the close down of financial intermediation companies and fund management firms as part of the recent financial services sector reforms. Indeed the financial resolution bonds used to finance the redemption of their funds had amounted to 15.4 billion by the end of September, up from GH¢10.6 billion as at the end of 2016.

The (near) cash payment of over GHc3 billion in bank deposits originally planned to be redeemed over five years and the redemption of funds under management – including those locked up in fund managers of uncertain legal status – will take that figure to at least GH¢20 billion before the end of this year.

But the reforms have not had a commensurate effect on the size of the fiscal deficit because government has elected to treat them as one off, below the line, expenditures.

The resolution bonds issued during the first three quarters of 2920 alone would have added one percent of GDP to the fiscal deficit.

Nevertheless, some public policy analysts are criticizing recent expenditures on refunds to depositors and investors as being simply election motivated even as government hides behind the social welfare needs of the populace due to COVID-19 to excuse away its inordinate fiscal deficit

On the upside though, the unprecedented fiscal deficit is not fuelling a major surge in inflation nor is it driving the cedi sharply downwards. After depreciating by 12.9 percent against the United States dollar in 2019, the cedi has only fallen by 3.1 percent so far this year. Inflation to is being kept under a lid; although it climbed well above the Bank of Ghana’s target band of between six and ten percent since the second quarter of this year, it has since fallen downwards, to 10.1 per cent by October.

This is unusual for such a high fiscal deficit although central bank Governor, Dr Ernest Addison explains that it is because the Ghanaian economy has been operating at well below its inherent capacity since COVID-19 dampened economic activities.

In turn this, coupled with innovative domestic deficit financing modes have also kept a lid on interest rates too, despite government’s extraordinary demand for credit this year.

Short and medium term treasury instruments of all tenors have seen their interest rates fall since the beginning of this year. 91-day bills from 15.20 percent to 13.55 percent; 182 day bills from 14.69 to 14.05; 364 days from 17.88 to 16.99; two years from 20.95 to 18.50; and three years from 19.70 to 19.00.

Most longer term rates and yields on the secondary market have risen but this is deliberate to retain the interest of foreign portfolio investors who buy a major proportion of those instruments.

Most importantly, the Ghana Reference Rate has fallen from 16.11 percent by the end of last year to 14.75 percent by October and this has enabled a drop in average lending rates from 23.59 percent to 21.26 percent.

Inevitably, monetary easing by the BoG and fiscal stimulus spending by the government itself have combined to give total liquidity a boost. Year on year total liquidity growth had risen to 30 percent as at October, up from 21.7 percent at the turn of the year.

Importantly, growth in net domestic assets has accelerated to 36.1 percent from 15.0 percent at the end of last year, while net foreign assets growth has slowed from 51.7 percent to 6.0 percent.

But the data also shows a worrying trend in that money is being taken out of the banking system. Growth in currency outside banks rose to 44 percent by October, more than twice the 20.2 percent growth as at December last year.

This is interpreted as a flight to safety by households who want to ensure easy access to their monies even during the most draconian lockdowns.

Underpinning Ghana’s economic resilience under the onslaught from COVID-19 has been the external sector which has provided the cedi with its stability and thus stable domestic cedi denominated prices as well. By October Ghana had gross international reserves of US$8.627.8 billion, up from US$8.093.7 billion a year earlier.

But building the reserves has been a difficult task. By October, the overall balance of payments position was negative to the tune of US$675.73 million, a reversal of the positive US$878.87 million by that time in 2019.

Nevertheless, the trade surplus for the first 10 months of 2020, at US$1,743.6 million, was higher than that during the corresponding period of the previous year of US$1,491.6 million.

Actually, total exports were down, from US$12,981.4 million to US$12,001.3 million. Revenues from cocoa and oil dropped significantly but gold receipts rose by some 10 percent on the back of a 28 percent increase in realized global market prices. But import bill fell even faster, from US$411,489.8 million to US$10,257.7 million during the respective first 10 months of the last two years.

The trade balance more than offset the current account balance deficit of US$1267.2 million which was smaller than last year’s US$1,497.3 million. But then the capital account surplus was smaller too, at US$365.5 million, down from US$2,273.2 million.

Ghana’s gross international reserves as at October were enough to cover 4.1 months of imports, reflecting its improved external position. But debt sustainability issues could persuade investors to demand a risk premium, when government goes to the market to issue Eurobonds.

If that happens government will have to choose between talking enough for refinancing existing debt or just taking what it needs for budgetary support.

Which is just one of the many crucial decisions facing it as its mandate, given in December 2016 winds down and it seeks a renewal.