Government sliding into debt trap – IFS

Economy policy think tank Institute for Fiscal Studies (IFS) says the increasing concentration of short-term debt in the overall public debt profile poses significant challenges to the health of the economy.

IFS in its latest mid-year budget review, released last week said the fact that short-term domestic debt has reached 31 percent of the country’s GDP is a major concern for the managers of the economy.

“The debt-to-GDP ratio is not only rising astronomically but has already reached a level considered to be above the sustainability threshold, posing serious headwinds to economic growth.

“The public debt is also concentrated at the short-term end of the market, putting pressure on the budget from the high cost of refinancing. Although the government hopes to lengthen the maturity profile of the public debt stock by actively increasing the share of longer duration foreign debt in the portfolio, it is planning to open up the two-year note to foreign investors.

Although the firm hailed government’s move, it said the two-year note also has its downside effect of adding to the short-term debt stock with its high and rising debt service costs and also making the economy more vulnerable to both domestic and external shocks.

According to the Accra-based policy think tank, Ghana’s effort at restoring its weakening macroeconomic situation is constrained by the level and composition of its public debt. As at July, the country’s debt stood at about GHC83 billion; out of which domestic debt makes up GHC36.5 billion.

“The debt composition has become a major source of risk, trapping debt managers in a vicious circle (sic) of short maturity high risk currency depreciation-high debt levels,” the firm said.

Ratings agency, Fitch, last week expressed grave concerns about the country's high interest payments amidst a decision to affirm Ghana's credit rating at 'B' with negative outlooks.

As per the government's plans as spelt out in the 2015 revised budget, total interest payment is estimated at GH¢9.34billion. Of this amount, GH¢1.6billion will be expended on external interest while GH¢7.7billion will be for domestic interest payments.

As of July this year, government had paid GH¢4.8billion as interest payment on both external and domestic debts.

Fitch said, "High domestic yields and a 60% depreciation in the currency since 2012 have pushed up borrowing costs, with interest payments now accounting for one-third of government revenue -- the highest level among Fitch-rated sub-Saharan African sovereigns.

"High interest service costs limit fiscal flexibility and will complicate consolidation efforts. Financing the deficit is expected to remain challenging, particularly with the IMF programme restricting deficit financing by the central bank to 0% next year."

A statement by the Finance Ministry earlier this month attributed the growth in public debt in recent months to the significant risk of exchange rate volatility which affected more than 50 percent of the entire public debt stock.

“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 the medium-term objectives. The real challenge though is whether government will be able to demonstrate fiscal prudence in the run-up to the 2016 elections.

“This underscores the call on government to slow down borrowing, unless the borrowed funds are used to finance projects that can generate funds within a reasonable time period to pay off the loan,” the IFS said.