Economy caught in debt web
Ghana has, in recent years, boosted its appetite for borrowing as the government attempts to get its way out of an economic crisis that is the outcome of years of fiscal indiscipline and poor economic management.
When the fiscal deficit jumped from 5.8 per cent in 2009 to 10.1 per cent in 2013, the government responded by increasing its presence in the financial market in an attempt to borrow its way out of debt.
The net result has been a mounting debt stock that now threatens the sound economic fundamentals attained between 2001 and 2006 when the debt forgiveness programmes — the Highly Indebted Poor Countries (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI) — restored macroeconomic stability and between 2009 and 2012 when a brief stint with the International Monetary Fund (IMF) helped to reverse the fiscal slippages of 2007/2008.
A GRAPHIC BUSINESS analysis of debt trends shows that the national debt stock went up by 1,453 per cent over the last eight years, rising from GH¢4.9 billion or 26.2 per cent of gross domestic product (GDP) in 2006 to GH¢76.1 billion or 67.1 per cent of GDP.
The debt burden accelerated at a higher pace between 2012 and 2014 than in any other two-year period since the country benefited from the landmark debt forgiveness programme under the IMF and the World Bank's HIPC and MDRI programmes in 2006.
As a percentage of GDP, the trend showed that the debt stock grew by 20.4 percentage points of GDP between 2012 and 2014, compared to 6.4 percentage points between 2009 and 2011 and 6.1 percentage points between 2006 and 2008.
Loans from development partners formed the greatest chunk of the debt stock, with little commercial debt, but the latter component has surged since 2012, with 20 per cent constituting interest charges incurred on loans procured in previous years.
Anxiety builds up These developments have triggered anxiety among some economists, most of whom opine that the situation, if not immediately checked, could drag Ghana back to the pre-HIPC and MDRI days when debt distress eroded the fiscal space and forced the government at the time to seek international aid.
Already, the Institute for Fiscal Studies (IFS) and the Institute of Economic Affairs (IEA), both policy think-tanks, concurred in their recent publications that the current debt position was alarming and required strong austerity measures to help plug the budget deficit through expenditure cuts and robust growth in revenues.
"Should we continue on this path, our national debt will grow to about 70 per cent of GDP by 2016 and close to 100 per cent by 2020, returning our nation to where it was some 30 years ago, at the brink of financial collapse," the IEA said in a statement signed by its Board Chairman, Dr Charles Mensah.
The IFS, on the other hand, said in its maiden publication, 'A Review of the 2015 Budget’,: "The pace of the recent debt accumulation suggests that the country could return to HIPC status sooner than later.
Based on an assessment of external public debt indicators, Ghana now faces a high risk of debt distress. The country's overall debt vulnerabilities have increased and its debtservice to domestic revenue ratio has approached a high risk level."
Rising cost of servicing loans
Although the government has dismissed these concerns by economists as too sweeping and premature, the economic fundamentals suggest otherwise.
As of December 2014, debt servicing cost, a key indicator of the impact of debt on the economy, accounted for about 40 per cent of total tax revenue. This means that for every GHc1 collected in revenue, more than 40Gp was used to service the cost of loans, leaving the rest for capital expenditure, compensation of employees, among others.
The phenomenal rise in interest payments from GH¢1 billion (2.7 per cent of GDP) in 2009 to GH¢7.8 billion (6.8 per cent of GDP) in 2014 also meant that for the first time since 2000 the amount the country expended on interest payments had overshot what it spent on capital goods such as infrastructure.
The 2015 budget now estimates that servicing these loans will cost the nation some GHc9.58 billion, equivalent to 7.1 per cent of the year's estimated total output. "This is, indeed, very alarming because the interest payment burden is getting closer to the level that pushed the government to opt for the HIPC debt relief in 2001," the IFS publication said.
In 2000, interest payments amounted to 7.5 per cent of GDP. BoG on the carpet An economist, who declined to be quoted, explained that the rising debt, especially the external component, and its accumulating servicing costs even had the tendency to put the Bank of Ghana on the carpet, given that it risked sapping all the country's foreign reserves. "If the trend continues this way, a time will come the BoG itself will run into some difficulties because it will find it hard getting forex to meet liabilities and that will be disgraceful," the economist said.
While siding with previous stances on the impact of debt on the economy, Prof Peter Quartey, the Head of the Economics Department of the University of Ghana (UG), explained in an interview that recent developments called for introspection on the country's debt position, including a debt sustainability analysis (DSA).
"It means that the situation has reached a point where we need to pull the breaks to avoid the overall impact. To reduce it, we need to put our house in order," he said.
Putting the house in order requires an improvement in the macroeconomic environment through reductions in the fiscal deficit, strengthening the cedi and easing inflation, the three variables that have long put government finances on the carpet.
But while that happens, Prof Quartey, who is also a Senior Economist at the Institute of Statistical, Social and Economic Research (ISSER), and other economists concurred that the country needed to vigorously pursue austerity measures aimed at cutting expenditure and growing revenue.
"If you cut down borrowing and increase revenue but do not control expenditure, then you have not done much. In our case, we need to plug the leakages in the system to ensure that we get value for money," Prof Quartey said.
Revenue leakages
Revenue leakages through system failures, corruption and other financial irregularities in the public sector have been a cause of concern to the country, with the Audit-General's reports flagging them year in year out.
Between 2008 and 2012, for instance, the report showed that the state lost some GH¢4.2 billion to such irregularities, majority of which were perpetuated in the ministries, departments and agencies (MDAs). "If we can plug some of these leakages and then diversify the revenue base, then we will not have problems with debt," the Senior Economist at the ISSER said. — GB