Ghana is classified as a frontier market in the region with fairly strong fundamentals which have posted modest economic growth over the period. As a market access country (MAC), the economy has been integrated with the international capital market. In the mist of tight global financing conditions, and the fact that the country is now a middle income economy, its borrowing needs has been diversified. The dry out of overseas development assistance (ODA) and the waning of concessionary facilities have made the country to gradually shift away from traditional FDI inflows towards non-residence flows, such as portfolio flows and cross-border bank inflows. However there is associated risk to the current rebalancing of external financing by the country.
According to the Regional Economic Outlook of The IMF, the traditional FDI flows are much more associated with domestic investment and economic growth compared to portfolio flows. The later boost public consumption and has little support for growth and investments; it influences the movement of exchange rate, causes output above trend and fuel credit growth. The associated vulnerabilities are financial crisis as a result of debt accumulation. These explain why the government may have to strengthen its domestic policy in order to slow down its external debt accumulation. Also our domestic debt market should be deepened to a level that it can serve the financing needs of government. Our emphasis here is the rate of debt accumulation and its attendant volatilities for stability and growth of the economy.
The rebasing of the GDP in 2018 at a time that there is an expansion in oil production in commercial quantities gave the country a positive outlook; the economy expanded by about 25% after the rebasing. The improved macroeconomic environment has an impact on credit rating of the country by the international rating agencies. These among other factors have enhanced the capacity of the economy to absorb more debt. This has enabled the government to increase its borrowing needs for budgetary support as well as other financing needs.
The 2019 supplementary budget indicates that government’s expenditure is going to increase by GH¢ 6.4 billion, this is without corresponding increases in revenue. It implies that there’s going to be more borrowing in order to finance such expenditure and that automatically adds to the debt stock. Sources from Bank of Ghana indicates that the total liability of the nation as at July this year is GH¢ 205 billion, sharing this among a population of 30 million people, each person owes as much as GH¢ 6,850. This GH¢ 205 billion works out to about 59.4% of the entire output of the economy. In other words, if you add the value of all goods and services in the country, 59.4% of it is owed to the debtors. The frightening aspect of this is that 31% of the entire debt is owed to foreigners, that works out to GH¢107 billion. Only 28% is owed to residence of this nation and that amounts to GH¢98.3 billion. It is estimated that from July 2018 to July 2019 additional GH¢45.8 billion has been added to the total debt stock. This is a reversal of the downward trend of the debt from 2017.
The IMF fiscal Monitor Report released in Washington DC at the last spring meetings indicates that Ghana’s debt to GDP ratio could reach 62% by the close of the year. What this means is that within one year the ratio could increase by about 4%. I think the current rate of debt accumulation by the government could defy this projection. This is because if within one year the public debt grew by GH¢45.8 billion and if the trend should continue, the country will be adding additional GH¢ 253 billion to its national debt stock at the end of 2019. The 2019 budget estimates indicates that the government plans to issue Eurobond $3 billion out of this amount $2 billion is for budgetary support and a liability management of $1 billion, and an outstanding Cocobod’s contingent liabilities of up to GH¢ 1 billion. The banking sector bailout is not complete and the cost could still rise. The proposed monetization of the GETFund and mineral royalties to the tune of $1 billion in total could backfire adding more burden to government’s debt. The impact of unfavorable external environment could cause a further volatility of the cedi which depreciated about 8.4% against the US dollar in 2018. All of these in addition to the electoral cycle expenditure hikes in 2020, could raise the total debt to GDP ratio to about 70.8% which is breaching the 65% threshold set by the IMF Debt Sustainability Framework (DSF) for countries in debt distress. And according to a the classification by the Economic Commission for Africa (ECA), Ghana will then be classified as a highly indebted country alongside Zimbabwe, South Sudan, Sudan, Mozambique, and Chad in that category.
Is there any hope for this country? I doubt this because if one spends the disposable income on consumption without investments or savings the person is likely to always go about borrowing for certain pressing needs. The revenue forecast by the government for the year 2019 is GH¢ 58.9 billion. Meanwhile the projected expenditure for the year is GH¢ 74.6 billion. The difference between the two is GH¢ 15.7 billion, therefore the deficit ratio will be 4.5% compared to 3.8% in 2018. So how is government going to finance the GH¢ 15.7 billion deficit? Out of the total expenditure envelope for the period, how much is going to investment as against consumption? The Institute for Fiscal Studies (IFS) has reported that government’s capital expenditure is being crowded out by expenditures on goods and services. From 0.8% in 2015, expenditure on goods and services increased to as much as projected 2.0% in 2019 at that same time, capital expenditure has been reducing from 4.0% in 2015 to 1.6% in 2018, only up slightly by 2.2% in 2019. This means that the current government is investing very little on infrastructure whiles spending more on consumption.
In order to mitigate the risk of further debt accumulation the government has decided to stick to The medium term debt management strategy MTDS), designed to regulate borrowing and to check fiscal excesses. In line with the fiscal consolidation effort of the government consistent with the debt sustainability frame work, parliament enacted the Fiscal Responsibility Act, 2018 (Act 982) to cap fiscal deficits at 5% of GDP, this is intended to keep the debt to GDP ratio at the threshold of 65%. To improve public financial management PFM Act, 2016 (Act 921) will be strengthened by accompanying regulations which will be submitted to parliament. The government has also established Fiscal Responsibility Advisory and Financial Stability councils. All these measures notwithstanding, the government will have to be more discipline in order to save this country from bankruptcy.
By Cheno Malik | Economic Policy Analyst | Hudda20003@gmail.com