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Business News Wed, 7 Aug 2019

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Mid-year budget: Out of every 1 cedi collected as revenue, 51 pesewas is used to pay debts

Ghana’s public debt reached GH?203.9 billion in June 2019 and the cost of servicing this debt seems to be choking government’s ability to spend on the needed capital infrastructure.

The Finance Minister Ken Ofori-Atta las week presented the 2019 mid-year budget requesting to spend an additional GH¢6.4 billion in the supplementary budget. Out of this amount, more than 6.1 billion will be used to pay interest on government’s borrowing.

This latest demand brings the government’s debt service expenditure in relation to government revenue to about 51 percent.

It means that debt servicing consumes more than half of what government it collects as revenue. Thus, for every cedi the Ghana Revenue Authority will collect as taxes, more than 51 pesewas will be used to pay interest on loans and other debts.

This development leaves government with no other option than resorting to the capital market to raise funds to finance its capital expenditure as well as to spend on its goods and services.

History

Historically, debt service expenditure, comprising interest and amortization payments, absorbed 26.8 percent of total revenue and grants in 2013, but this increased rapidly to 47.9 percent in 2016.

The ratio then fell to 44.5 percent in 2017 and to 44.3% in 2018. However, given the revisions to spending in the mid-year budget, the ratio is set to rise sharply to 51.2% in 2019 — close to double the 2013 ratio.

Speaking at the Institute for Fiscal Studies’ 2019 mid-year budget review, Leslie Dwight Mensah, an economist with the Institute stated that the burden of debt service expenditure on the government’s finances is very high and increasing.



According to Mr. Mensah, the Finance Minister’s reference to debt-to-GDP ratio being less than 60 percent as one of the positive macroeconomic indicators is misleading.

“This suggests that the fall in the debt ratio to below 60 percent of GDP since the rebasing of the national income accounts in 2018 has given a false sense of security about the debt position. In reality, however, there should be no comfort taken in a lower debt to-GDP ratio in the present circumstances,” he added.

“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 the government,” he added.

Source: citibusinessnews.com

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