IFS raises red flag over rising public debt

The Institute of Fiscal Studies (IFS) has raised serious concerns over government’s decision to raise an additional GH¢6.3billion through borrowing to finance its expenditure for the rest of the year, saying “the fiscal policy path the country is on is unsustainable”.

In its post-budget analysis, the policy think-tank said considering the country’s current revenue situation, there is no way other than borrowing that government can raise the money requested by the Finance Minister in the Mid-year Budget – a decision that the IFS maintains will push debt as a percentage of GDP to more than the current 59.2 percent.

What is even more dreadful, the IFS says, is the debt servicing ratio - the percentage of revenue that is used to pay debt — which has more than doubled since 2013. It is projected to hit 51.2 percent by end of the year from 44.3 percent recorded last year. It is for this reason that IFS is calling on government to reverse the trend.

“The burden of debt service expenditure on government’s finances is very high and increasing, even if the debt-to-GDP ratio is now lower because of the GDP rebasing and recalculation. This calls for urgent steps to limit further borrowing. It is also crucial to eliminate extra-budgetary expenditures and borrowing – which despite their being excluded from the budget deficit and, in some cases the debt stock, still create debt service liabilities that must be met from the same limited revenue envelope available to government.

“Overall, the fiscal policy path the country is on is unsustainable, as the country’s indebtedness looks likely to worsen on the basis of current spending and borrowing decisions. Government has to reverse course with a strategy that will reduce borrowing significantly in order to improve the debt dynamics, particularly with regard to the ballooning debt service costs,” the IMF said in a statement presented by Research Fellow, Lesley Dwight-Mensah.

The debt level has recently gained public attention and become a matter of concern for stakeholders of the economy, which include the World Bank, IMF, policy think-tanks, and other economic and financial analysts, especially when government revenue mobilisation comes into the picture.

The Mid-year Budget indicates that total revenue and grants for the period amounted to GH¢47.6billion, equivalent to 15.8 percent of GDP, against the annual programme target of GH¢49billion which is 16.4 percent of GDP.

This moved Finance Minister, Ken Ofori-Atta, to request an upward adjustment in the road fund levy, energy sector levy, price stabilisation levy and communications tax in order to boost domestic revenue mobilisation.

The IFS, however, is advising government to set realistic targets for domestic revenue mobilization, as the consistently-missed targets disrupt the fiscal programme and undermine effective budget execution.