Debt distress – a consequence of mismanaging the economy

Ken Ofori-Atta, Minister of Finance

Recent articles on Ghanaian public debt have raised concerns on whether the Government’s current economic policy is sustainable. The finance minister Mr Ken Ofori-Atta has been accused of living in economic ‘fantasy land’.

Setting macro-economic issues aside, there were also media reports that the energy bond issue was badly micro-managed: costs amounted to GH¢ 177 million with only half the bonds taken up by investors. In addition, of all the bonds sold, only around 700 GH¢ was fresh capital, with the remaining GH¢ 4 billion part of a debt swap with banks that are owed money by the Government. So what is the story on Ghanaian debt? Is the energy bond issue a precursor of things to come?  

When the Ghanaian Finance Minister, Ken Ofori-Atta, stood up and gave his budget in November, he was in high spirits. The government had “turned the economy around” he said, and brought “relief to Ghanaians”.  In reality, Government debt hasn’t budged – it has gone up. Over 40% of the Government’s revenue is now going towards debt payments, way over the 18% to 22% considered by the International Monetary Fund (IMF) as sustainable.

And the more money goes towards debt payments, the less money there is for essential public services. This means less money to pay contractors owed money by the Government, less money for essential infrastructure upgrades and less money for public health.

The country now seems to be going back back to 2005, when the International Monetary Fund (IMF) wrote off Ghanaian debt under the Heavily Indebted Poor Countries Initiative. Is Ghana under the current finance minister again becoming heavily indebted and poor?

Certainly, under Mr Ofori-Atta the borrowing continues. A further $95 million was drawn down in September from the credit facility agreed in 2015, with the IMF  extending loan arrangements to 2019. In itself, this extension is a worrying signal on the Government’s ability to repay its debts on time.

The government debt to GDP ratio, expected two year ago to be at 65% is now at 73% and still rising. A high and rising ratio means public finances are getting worse, and for countries with a low tax base such as Ghana, over 70% is considered ‘the danger zone’. It is not surprising then that the IMF issued a warning in June that “Ghana remains at a high risk of debt distress”.   

Put simply “debt distress” is an extremely serious situation in which a country can neither pay its debts nor go on borrowing. In other words, a bankruptcy, the last stop for debt bingers. Taking this into account one would think that Mr Ofori Atta would present a credible debt reduction plan, based on fiscal discipline and responsibility.

But instead the situation is getting increasingly chaotic. Last week we were told that to renew Ghana’s cocoa stock and improve cocoa storage and transport infrastructure, the country needs to borrow a further $1.3 billion. Exactly the job for the Agriculture Development Bank – but under new proposals this bank will be phased out. So how are domestic banks, currently struggling with new capitalization requirements and Government’s unpaid invoices, going to participate in this lending program is anyone’s guess. 

Taking all of this into account, it is not a surprise that the credit agency Moody’s singled out Ghana a few months ago as a country particularly vulnerable to a sudden loss of access to money markets, or a rise in borrowing costs. It has awarded us a ‘negative outlook’, a far cry from the rosy picture presented in the Budget.

This translates into economic pain for ordinary citizens, who will ultimately have to pay the bill for the mismanagement of the economy. In other words, to save Ghana from ‘debt distress’ we need a competent and credible debt reduction plan, and fiscal responsibility at the highest level. Is this something that the finance minister can deliver?

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