Debt Management Under the New Government
Debt sustainability has been one of the major problems facing most countries even before the outbreak of the COVID-19 pandemic. Ghana, one of such countries, has been battling with the situation for some time now; a situation that forced the government to enroll in the HIPC initiative in 2001 resulting in majority of its debts pardoned.
Shortly after that, the country’s appetite for borrowing started growing steadily and is currently listed among the high debt distress economies in the world by both the IMF and the World Bank. Due to its consistent borrowing, the government has always spent a chunk of its meager revenues on interest payments.
According to the Institute for Fiscal Studies (IFS) Ghana, interest payments accounted for an average of 18.4 percent of domestic revenue in 2009-2010, then dropped to an average of 14.8 percent in 2011-2012, but rose to an average of 30.3 percent in 2014-2015.
The 2019 Annual Public Debt Report shows that a total of US$874.6 million was paid as interest on government borrowings. This was 11.9 percent higher than the US$781.7 million recorded in 2018. The finance ministry attributed this to interest paid on the 2019 Eurobond which was issued in March 2019.
In 2017, the government spent a total of US$571.5 million on interest payments. The deviation of US$211.8 million recorded between 2017 and 2018 was attributed to the interest paid on the 2018 Eurobond which was issued earlier than anticipated. Interest cost as a share of total external debt service cost in 2018 was 31.3 percent.
Provisional figures from the ministry of finance indicate that Ghana has spent a total of GH¢ 11, 639 million on interest payments between January and June 2020. This accounts for 3.0% of the country’s GDP.
Moreover, the government plans to spend GH¢7.0 billion on interest payments in Q1 2021. Surprisingly, projected revenues including grants totaled GH¢13.3 billion for the period. This means that 52.63% of the total revenues including grants will be used to pay interest on loans in Q1 2021.
As of End-December 2019, the total gross public debt stock stood at GH¢217,990.7 million. This was 62.4 percent of GDP, up from 57.6 percent at End-December 2018. The justification provided by the finance ministry for the 4.8 % jump in the ratio between 2018 and 2019 was the impact of the financial and the energy sector bailouts. Debt in 2019 was made up of GH¢112,509.4 million and GH¢105,481.2 million for external and domestic debt respectively.
Debt sustainability, therefore, has become a major concern for the country. The IFS, therefore, has called for drastic measures to address the menace of rising debt in Ghana.
“… the fiscal outlook still poses serious challenges for debt sustainability and the country is likely to continue to be at a high risk of debt distress on account of unfavorable trends in the country's debt service relative to domestic revenues and export earnings. This calls for additional measures and strategies to contain the rise in the public debt stock and the resulting high-interest costs.”
The World Bank and the IMF, however, expect the country’s debt to continue to rise and only return to sustainable levels in the next 5 years.
“Total public debt is not expected to fall below the 55 percent of GDP threshold until 2026. The slow pace of decline compared to the previous DSA vintage derives from worse fiscal positions, higher projected interest rate costs, and residuals.
“More structurally, fiscal performance continues to be burdened by low government revenues and growing interest bill as deficit financing shifted from concessional to commercial sources. But the debt-to-GDP ratio would only begin to decline in 2022 with growth rebounding as new oil concessions come on line” – IMF & World Bank.
“Debt sustainability is hinged on maintaining consistent levels of primary surpluses while we continue with prudent management of contingent liabilities” – Ministry of Finance.
The current stock of public debt
Exactly 16 years after Ghana graduated from the HIPC process, the country’s stock of debt is revisiting its old base.
Furthermore, the COVID-19 pandemic has currently impacted heavily on the fiscal position of the country; unbudgeted expenditure has resulted in increased government spending. With weak revenue mobilization, the government has resorted to borrowing to finance its numerous interventions.
Recent macroeconomic and financial data released by the Central Bank of Ghana (BOG) shows that from January to September 2020, Ghana has accumulated a total of GH¢54.2 billion in debt. The total stock of public debt was GH¢219.6 billion at End-January 2020 but shot to GH¢273.8 billion at end of September 2020. As a percentage of GDP, the current figure represents 71%.
Gross public debt stock for the first nine (9) months of the year is presented in Chart 1 below. In parenthesis are the debt to GDP ratios.
Chart 1: Gross Stock of Debt, January- September 2020 (Billion ‘GH¢)
Source: Bank of Ghana
Public debt experienced the highest growth rate of 7.8% in Q1 2020. The growth rate, however, slowed down to 4.4% between April to June (Q2) before declining by just 0.4% between July and September to end Q3 at 4%.
Chart 2 presents the quarterly growth rates of public debt for the first three quarters of the year 2020.
Chart 2 Quarterly analysis of Public debt (% growth)
A year-on-year analysis shows that public debt has gone up by GH¢64.7 billion between September 2019 and September 2020, representing a growth rate of 30.9%. In September 2019, the total stock of public debt stood at GH¢209.1 billion, which accounted for 59.8% of GDP.
Composition of debt
According to data released by the BOG, the domestic debt component of the total debt stock has increased from GH¢ 129.0 billion (33.5% of GDP) in August 2020 to GH¢135.3 billion (35.1% of GDP) at the end of September 2020. However, the domestic debt at the end of September 2019 stood at GH¢101.4 billion representing 29.0 percent of GDP.
Government’s revenue mobilization has been poor despite the immense pressure on the government to meet its numerous needs. The inability of the government to mobilize enough revenues has been the main reason why it continuously resorts to borrowing. Most often than not, government misses its revenue targets.
In 2018, the government’s total revenues and grants amounted to GH¢47,637 million, which represented 15.5% of GDP. In 2019, total revenue and grants amounted to GH¢53,379.61.14 million (15.3 percent of GDP), which was lower than the target of GH¢58,896.53 million (17.0 percent of GDP); a shortfall of GH¢5,517 million. This outturn in nominal terms represented a per annum growth of 12.1 percent, despite the 9.4 percent shortfall relative to the revised target. Domestic Revenue, which comprises all revenues except Grants received from Donor Partners, constituted about 98.1 percent and amounted to GH¢51,988.01 million compared to a target of GH¢57,786.66 million. The recorded shortfall in Domestic Revenue was mainly due to a shortfall in non-oil tax revenue driven by the weak performance of all tax handles in 2019.
In 2020, total revenue and grants for January to June 2020 amounted to GH¢22,007 million, compared with the program target of GH¢29,759 million, resulting in a shortfall of 26.0 percent or a performance rate of 74.0 percent. The provisional outturn constitutes 32.8 percent of the annual target compared to the programmed expectation of 44.4 percent of the annual projection.
Higher expenditure relative to revenues always means constant budget deficits. Aware of this, the government normally aims at reducing its deficit. This has, however, not been the case as the government's targets have always been missed.
Government targeted a budget deficit of GH¢10,971.2 million (3.7% of GDP) in 2018 but the provisional budget deficit outturn for 2018, excluding the financial sector bailout, was GH¢11,672.4 million (3.9% of GDP). The ministry of finance then cited lower than expected revenues relative to expenditure as the reason why the target deficit couldn’t be met, including financial sector clean-up costs, however, the provisional budget deficit outturn was GH¢21,474.0 million (7.2% of GDP) in 2018.
Also, the overall budget balance in 2019 recorded a cash deficit of GHȻ16,891.84 million, an equivalent of 4.8 percent of GDP, which was financed from both domestic and external sources. The companion fiscal indicator, the primary balance, recorded a surplus of GH¢2,877.41 million (0.8 percent of GDP) in 2019.
The government’s fiscal operations in the first half of 2020 resulted in a cash basis deficit of GH¢24,345 million, or 6.3 percent of GDP, compared to the program target of GH¢11,794 million, or 3.1 percent of GDP for January to June cumulatively. Total Expenditures including arrears clearance amounted to GH¢46,352 million, exceeding the target by 11.5 percent. The minister of finance, Ken Ofori-Atta indicated that the lower revenue performance against the programmed target and higher expenditures compared to the target, significantly influenced by the impact of the COVID-19 pandemic.
For the first quarter of 2021, total Revenue and Grants are projected at GH¢13.3 billion while total expenditure including the clearance of arrears is projected at GH¢24.0 billion. This results in the projected fiscal deficit of GH¢10.7 billion for the period.
End of Year Forecasts of Debt Stock
The International Monetary Fund has forecast a debt-to-GDP ratio of about 76% by the close of the year 2020. The IMF expects the country’s external debt to increase to 34.5% of the country’s GDP in 2020, from 30.3% recorded in 2019. This is above the 28.1% forecast for the whole of the Sub-Saharan African region. The Fund, however, expects this to decline to 32.0 percent in 2021 in its recent forecast.
The parliament of Ghana having approved an amount of GH¢27.4 billion to carry on the services of government in the first quarter of 2021, will see the debt stock likely to go up as the government plans to borrow more from the capital market next year.
Policy Considerations to manage the rising debt
In 2021, the next government, though same, must try as much as possible to limit its borrowings and rather resort to using more innovative ways to raise revenues, leveraging the recent investment in technology in the country.
The government must make frantic efforts to increase tax revenues from large companies and rich individuals. The government can also pass the ‘millionaires levy’ as has been done in Argentina recently to raise money for specific projects.
Also, the government must cease to grant tax waivers, including for public-private partnership projects, and increasing the capacity of tax collection authorities to ensure existing laws relating to issues such as transfer mispricing are implemented.
Similarly, the government must stick to its 2020-2023 macro-fiscal framework, borrowing plans, and debt sustainability analyses. Specifically, the next government must stick to the implementation of its liability management program to actively manage the public debt portfolio by redeeming benchmark size bonds before maturity with the view to minimize refinancing risk.
It is expected that the suspension of the government’s fiscal rules must be reinstated as COVID-19 cases continue to decline in addition to the vaccine that has been found.
Last but not least, the next government needs to ensure transparency in debt management. The government must make sure to disclose all individuals or institutions that hold the greater portions of its debts.
To achieve these, the Ghanaian government should periodically conduct a debt audit to publicly reveal how much debt there is, which loans were given by, what the loans were used for, that is, whether for projects or general budget support, and on what terms.