Times are rough for the taxman in Ghana. For a third straight year, revenue targets set in the national budget
look likely to be missed. In the last two years, such an outcome meant cuts to public expenditure, especially the resources budgeted for capital investment, in a bid by the government to keep the lid on borrowing. This year, however, with the government under pressure to spend more generously to placate a restless electorate, there is a danger that borrowing could be increased to offset lower revenue, which could worsen the already high public debt and debt service cost. This would be bad for Ghana.
Public anxiety over national debt has heightened recently. This is quite justified as the debt is mounting, while politicians from the country’s main parties—the ruling New Patriotic Party (NPP) and the opposition National Democratic Congress (NDC)—engage in recriminations over who bears greater responsibility for the problem. A decade ago, in 2009, the stock of debt stood at GH₵13.3 billion, equal at the time to US$9.3 billion. By the end of 2016, the debt had soared to GH₵122.3 billion, equivalent to US$29.2 billion. As at June 2019, the debt stood at GH₵203.9 billion or US$38.7 billion. In per capita terms, each Ghanaian owed GH₵568 (US$397) in 2009, but this increased to GH₵4,319 (US$1,032) in 2016 and GH₵6,733 (US$1,280) in June 2019.
For economists, a country’s indebtedness is more meaningfully assessed by comparing its stock of debt to the value of its total annual production of goods and services, otherwise known as Gross Domestic Product (GDP). The idea is to see how much of the national income would need to be spent to eliminate the debt in one fell swoop. Appraised this way, Ghana’s debt climbed from 27.2% of GDP in 2009 to 56.8% of GDP in 2016 and reached 59.2% of GDP in June 2019. The International Monetary Fund (IMF) is projecting the ratio to hit 60.5% of GDP by year-end.
Behind the debt, build-up is the simple fact that the country has been living substantially beyond its means for a long period of time. This means there have often been wide gaps between government revenue and expenditure, which are financed by loans taken from domestic and foreign sources. Loans sourced from abroad have a particularly ruinous effect on the debt dynamics because the domestic-currency value of foreign debts rises whenever the local currency, the cedi, depreciates—which happens to be the norm. This is a big problem; as more than half of the debt stock is foreign-currency-denominated.
Between 2015 and April 2019, Ghana undertook a financial assistance program with the IMF with the goal of reducing its budget deficit—the gap between state revenue and expenditure—and debt-to-GDP ratio and stabilizing the economy. The program achieved many things, including cutting the deficit from 7.4% of GDP in 2014 to 3.9% of GDP in 2018. The debt-to-GDP ratio kept up its rise, however, in part because, though declining, the budget deficits were still high, on average, and the exchange rate continued to depreciate, even if at a slowing pace.
What has also added to the growth in debt since 2018 is the issuance of special resolution bonds by the government (worth GH₵11.2 billion (US$2.1 billion) as at June 2019) to plug shortfalls between the assets and liabilities of nine insolvent banks that have been brought under state control. The Institute for Fiscal Studies, a fiscal policy think tank, estimates that without these bonds, the debt-to-GDP ratio would have declined in 2018 to something lower than it was in 2016. The government says it needed to issue the bonds to facilitate the takeover of the insolvent banks, and that the exercise helped to safeguard the deposits of 2.7 million customers.
A major concern with the debt burden is the high cost of servicing it. In 2018, debt interest expenditure ate up 33% of the government’s total revenues. This compares with 15% in 2009. What this means is that, after servicing its debts, the country has less money left than in the past to spend on public programs, including infrastructure investment to boost growth, improve the quality of life, and create jobs for a restless, youthful population. Such a situation has tended to push the government to seek further loans to build the sorely-required new roads, power stations, and water systems, effectively ensnaring the country in a vicious cycle of debt and rising debt service cost.
When Ghana was caught in a similar, though less crushing, debt trap at the turn of the century, it turned to the IMF- and World Bank-sponsored debt-relief program known as the Heavily Indebted Poor Countries (HIPC) initiative. HIPC offered to cancel a huge portion of the external debts of poor countries owed to the IMF, World Bank, and Western bilateral creditors, provided the beneficiaries implemented macroeconomic reforms and applied the debt-service savings to reduce poverty in their countries. Much of Ghana’s external debt was wiped off under HIPC, which was followed by additional debt forgiveness via another Western-sponsored scheme, the Multilateral Debt Relief Initiative (MDRI). The debt ratio fell over this period (2000-2006) from 79.2% of GDP to 18.6% of GDP, and debt interest spending declined from 38% to 12% of total government revenue.
This time, unfortunately, debt forgiveness is not an available course out of the quagmire, for two reasons at least. First, a country can access debt relief only once under the HIPC program. Second, unlike two decades ago when more than 90% of the country’s external debt was owed to the multilateral and bilateral creditors that backed the debt relief initiatives, these days just about half of the external debt is owed to such creditors, with the other half owed to commercial creditors, including investors in international bond markets, where Ghana has issued billions of dollars of Eurobonds since 2007.
So what should be done about the debt? Basically, borrowing needs to be curbed by running lower budget deficits, which would limit the growth of the debt stock. Lower deficits entail raising more government revenue while moderating expenditure, including the public sector wage bill, which soaks up 41% of the government’s income. The revenue situation is quite acute, with the country able to mobilize just 15.8% of GDP as fiscal receipts in 2018. This is much less than is raised by most of its lower-middle-income peer countries, which collect 25% of GDP, on average, in annual government revenue.
In 2019, the government hopes to improve revenue collection to 17% of GDP, and following poor collections in the first half of the year, it hiked taxes in July to help it reach the target. The country could further boost its revenue ratio by strengthening weak tax administration, which has allowed tax evasion and avoidance to thrive, and by curtailing extensive and costly tax exemptions. Raising additional revenue will enable brick-and-mortar investment to be increased, which will generate the economic growth required to make debt sustainable. That is a future that all Ghanaians should vote for.