Should we be worried about Ghana’s Debt?

Ghana’s public debt as at December 2015 was GH¢97.2 billion ($25.6 billion). The domestic component of this debt i.e. the part of the debt owed to Ghanaian individuals or companies who buy treasury bills and other government securities was GH¢39.4 billion or roughly 41%. The other GH¢57.8 billion is owed to foreign individuals, companies and governments.

The total public debt is 72.9% of Gross Domestic Product (GDP). What this means is that Ghana’s total public debt is worth 72.9% of all the goods and services produced in Ghana every year. This percentage makes it easier for us to understand the debt and compare it over different periods and with different countries.

As seen in Fig 1.1, the debt to GDP percentage of Ghana has been steadily rising and people are worried. But others are saying that countries such as Japan have a debt of 250% of GDP and so we should not worry about 70%. In order to decide whether we should be worried or not we have to understand a few things about public debt.

Firstly, governments do not usually plan to repay their debts. What they do is retire the old debt by making out new loans. For example, the government will be borrowing GH¢5.5bn this month and GH¢5.2 billion of that will go towards paying old debt meaning that the total debt would have increased by GH¢0.3bn [Data: BoG (pdf)]. However, the government needs to pay interest on the loans it contracts as and when they are due. And this interest comes from the revenue it earns each year from taxes, grants, royalties, dividends and so on.

So let’s say you have a loan which you never have to repay (for argument sake) but you have to repay the interest on the loan. What matters most to you therefore is how much interest you have to pay on the loan. Having to pay less interest on loans is important because the government will have more money to spend on health, education, infrastructure and so on.

Therefore if Ghana is spending a higher proportion of its revenue on paying interest on debts then that is a reason to worry about the debt. This appears to be happening in Fig 1.2. [Calculations are mine from government fiscal data 2008 to 2015. That’s as far back as it goes. MOFEP fix it please!]

about 29% of government’s total revenue in 2015 was spent on paying interest on its debts. That is GH¢9 billion more than the GH¢5.9 billion from government revenue that was spent on capital expenditure in 2015. That is certainly something to worry about.

One may ask why government is paying more of its tax revenue in interest on loans. The obvious answer is that as the debt burden gets bigger, the interest burden gets bigger and that is shown in Fig 1.3 but that is not all of it.

The interest a country has to pay on its debt depends on the demand for its debt by investors which depends on the confidence they have on the country to repay (i.e. find new investors to sell the old debt to).

So for countries like the USA which investors have no fear it will ever default on payment, they can borrow at 2.58% (the 30-Year Treasury rate) even though their debt/GDP is 96.2%. Ghana on the other hand had to offer to pay 10.75% for the $1 billion 15-year Eurobond we issued in October 2015. The fact that our debt to GDP ratio had risen played a part in us having to pay higher interest rates for our debt. This is another reason to be worried about our debt.

Another reason to worry about debt is the growing size of the external component of the debt. The real value of domestic debt is reduced by inflation but external debt keeps getting larger as the value of the cedi depreciates against other countries. This large external debt puts a lot of power into the hands of our creditors to direct policies.

For example, Nigeria decided to borrow and spend a record amount to make up for the poor growth occasioned by the fall in oil prices. They are able to do this because they have an external debt to GDP of 2.7%. Growth has been falling in Ghana as well, but instead of spending to boost growth, we’ve had to cut the budget deficit under the IMF programme in order to continue having access to foreign credit.

Debt can be useful to a country. It finances government spending on infrastructure, health, education and others which creates employment in the country and increases demand for goods from the private sector (known as the crowding in effect).

It also provides investors with a safe asset, which everyone needs to store value. However, high borrowing by the government competes with the private sector for capital (known as crowding out) and raises the interest rate at which entrepreneurs can borrow to invest.

In summary, we should be worried about the size of our public debt because we spend a significant portion of the national revenue in interest payments and it affects the control we have over our economic policy.