IMF Resident Rep. speaks on Ghana’s debt burden and its management

Business24 recently engaged Albert Touna Mama, the International Monetary Fund’s (IMF) Resident Representative in Accra, on the country’s debt burden and management in the wake of the COVID-19 crisis. Below are his responses to our questions.

B24: How should the country deal with this debt accumulation in the period of the pandemic?

Albert Touna Mama (ATM): Ghana like many other countries is seeing an increase in the fiscal deficit and public debt as a result of the COVID-19 crisis. But we should keep in mind that this crisis is unprecedented in modern economic history. This is not just “any” shock.

Responding to the crisis has put an incredible amount of pressure on spending, reflecting the government’s duty of care toward its people, protecting lives and safeguarding livelihoods threatened by the pandemic. In addition, the slowdown in economic activity and trade has slashed government revenues.

The question is how to bring the deficit and the debt down once the emergency is over, given that there is a limit to how much debt one can accumulate before getting into trouble.

In Ghana, much of the spending increase is coming from the government’s efforts to cushion as many groups as possible and counter the massive revenue and productivity loss. This is commendable and really at par with what more advanced economies have done. It also helps put a floor under the collapsing economic activities.

To contain the government deficit to the extent possible, the focus could be on “prioritisation” when responding to this shock. The most vulnerable groups in the economy should come first, also because supporting everybody could be very expensive and not without risks.

In addition, and especially in the coming years, some level of “burden sharing” should be targeted, especially among the groups that have not suffered as much a loss of income during the crisis. We think that all these efforts should be supported by a strong impetus to advance fiscal reforms that have stalled in the past, particularly expanding the tax base and improving the efficiency of public spending, including by means-testing wherever feasible.

Elements for this strategy include reviewing property taxes, streamlining tax exemptions, improving tax administration, digitalising the economy, etc. Some of these reforms are also highlighted by the mid-year budget review.

Looking at a positive aspect, the pandemic has afforded countries a unique opportunity to build a better future by: maximising the potential of the digital economy; promoting green investment to combat climate change in a job-rich manner; and investing in human capital for a more inclusive economy.

B24: In all the options available, does the Fund support a push for debt forgiveness that will ease the burden of a country like Ghana?

ATM: The Fund together with the World Bank is supporting the G20 Debt Suspension Initiative (DSSI) for the postponement of bilateral debt service, for which Ghana is eligible.

The DSSI could make some US$11bn available to 73 low-income and lower-middle-income countries through the debt service postponement. As it stands, over half of the eligible countries have made a request already.

Ghana has so far not applied to the initiative, though it is its prerogative. The rationale is that the potential savings from this initiative does not yet outweigh the costs in terms of the risk of credit rating downgrade or the risk of losing access to international capital markets.

What I mean by that is, applying to the DSSI may trigger cross-default clauses in some of Ghana’s commercial debt contracts, depending on the specific language in the clauses. If this happens then it would be very difficult to issue new debt in international capital markets, such as a new Eurobond.

B24: What’s the Fund’s view on the government’s plan for restoring compliance with the Fiscal Responsibility Act – i.e., coming back to compliance in 2024?

ATM: The government acknowledges the need to maintain medium-term fiscal sustainability despite the impact of the crisis, and we certainly support their objective to comply with the Fiscal Responsibility Act in the coming years.

However, we should recognise that the situation remains fluid and the uncertainty surrounding the evolution of the crisis complicates any assessment of the medium-term outlook and policymaking. For example, economists still don’t have a good understanding of whether the economic problems created by the COVID-19 pandemic will be self-reversing or mostly permanent.

Looking ahead, the challenge will be to strike a balance between economic recovery and restoring healthy fiscal metrics.

The Ministry of Finance has published the broad lines of a medium-term fiscal path. But considering the extreme uncertainty, it may be too early to formulate any solid and reliable medium-term fiscal trajectory. As the situation stabilises, the government will need to come up with well-articulated plans for a return to some sort of fiscal normality.

The next big milestone for this, hopefully on the background of a more stable environment, will be the next budget in first quarter of 2021 and to correct course if warranted.

B24: Also, what would be the implication for debt accumulation? Does the Fund project Ghana’s debt to be sustainable after the pandemic?

ATM: The pandemic has adversely affected both the solvency and liquidity indicators of most if not all low-income countries. Countries would end up in different situations depending on their debt metrics before the pandemic, the extent of their policy response, and the duration of the health crisis both locally and globally.

Our most recent assessment of Ghana’s debt, which we published with the report for the RCF [Rapid Credit Facility] in April, found debt at an unchanged high risk of debt distress, but still sustainable over the medium term. Of course, the COVID-19 shock has put more pressure on fiscal metrics and increased risks. For emerging market countries like Ghana, continued access to international capital markets is critical for debt to remain sustainable. This in turn hinges on the credibility of the fiscal trajectory.