Interest payment, debt sustainability: A non-technical conversation (2)

Revenue comes from exports, taxes, economic activities through economic growth and jobs. So, borrowing is done with future revenue in mind. Debt management cannot be undertaken without considering all these factors including depreciation.

Robust exports, lower interest rate, which is lower than growth rate, good tax administration are all needed to manage a sustainable debt regime. Using the Bank of Ghana policy rate as a proxy for interest rate or even 91-day Treasury bill rate or the weighted average lending rate, which are all higher than the growth rate implying this vicious cycle must be dealt with. On average, the yield on our bonds is higher than the growth rate of GDP, so these issues must be worked on.

Interest payment /Tax revenue

On average, from table 2, between 2017 and 2021, 47.86 per cent of tax revenue has been spent to pay interest on Ghana’s debt and 57 per cent in 2021, meaning the tax revenue is so burdened that it cannot support three major expenditure items.

Therefore, continue to deepen the vicious cycle of high borrowing and high interest payment. This is not sustainable. Another determinant of interest burden is interest payment /Total revenue with benchmark of 20 per cent.

Between 2017 and 2021, on average 38.7 per cent of total revenue is spent on interest payment which is above the threshold by 18.7 per cent.

Both interest payment /Total revenue and Interest payment /Export have been outside the benchmark, meaning all the debt sustainability ratios show serious vulnerability and distress.

The use of the word’’ broke’’ in financial discussions

Technically, experts prefer to describe acute financial situation of a country using expressions like debt distress, financial distress, default, risk of the economy and debt sustainability, among others.

All the debt sustainability analysis in this paper confirms fiscal distress, repayment burden and general hardship but will not simply be described with the word broke.

Ordinarily, when a person is ‘broke’, it means in the immediate time, he/she is not able to finance some basic needs because the level of income is limited. Some people use the term to mean so many things including poverty, bankruptcy, and default.

In extreme cases, some experts use the word "broke" synonymously with a "failed state". The use of the word, especially for government finances, sometimes create difficulties for government communicators.

When the word is used, it is only to express the sufferings, hardships, inability of government to meet the expectations of citizens.

The word does not mean there is no money. It only means the needs are not being met and is creating disappointments.

It does not mean that natural resources have finished, neither does it mean the government is not collecting taxes to generate revenue. It could, however, mean the public and opposition politicians are saying there is mismanagement, unprioritised expenditure, corruption, over borrowing, excessive taxes but the government is not able to deliver.

The public knows that it is because the country is facing financial, economic, and fiscal difficulties that is why in the mist of well-articulated hardships, we face the effects of forex depreciation on prices and public debt, many uncompleted projects, unpaid contractors and marginal increase in public sector wages and salaries.

The government should understand that the public knows these facts when they say the country is broke. They know all state institutions including Ghana Revenue Authority (GRA), Bank of Ghana are still functioning.

In fact, they know our cherished traders, entrepreneurs, spare part dealers, farmers and indeed washing bays, hairdressing salons and barbering shops are still in operation.

What they are communicating using the word "broke" is upward price development and the inability to finance the basic needs the home out of their toil and the over borrowing, high interest payment are the reasons for their suffering.

When government wants to introduce e-levy without refining it to reflect the concerns of the public it is because government does not have enough revenue and is facing interest payment challenges.

The business community knows that if banks are lending to government more than them, it is because government’s appetite for borrowing is competing with them to meet the acute financial needs. Thus the use of the word may be full of ‘undecoded’ verdicts on the government.

Conclusion

The use of tables and graphs covering a 5-year analysis from 2017 to 2021 provides a quick visual impression of fiscal vulnerability, debt distress and interest payment burden of the Ghanaian economy.

The trend provides a clear picture of unsustainability of borrowing. The economy is suffering from debt repayment burden, lower revenue than expected to remain sustainable.

Ghanaians use the word ‘broke’ to convey hardships and inability of government to meet basic expectations. The graphs below show increasing levels of both revenue and expenditure but expenditure trends up more than revenue.

Thus it is not true that revenue has not been performing, the problem is with the unwillingness to change the expenditure model. Dealing with export measures can also contain the debt distress of the Ghanaian economy.

The trend helps to make understanding simple and appreciate the clear picture provided over time, not at one point in time but over a period (2017-2021).

It helps to interrogate the trend for policy intervention as the main drivers and direction are seen over time. Sectoral performance trended downwards from 2017 even though flagship policies such as Planting for Food and Jobs and one-district, one-factory have been implemented.