Emmanuel Acquah-Sam’s thoughts …Evaluation of the endless cycle of rising national debt

National debt – also known as government debt, sovereign debt, country debt, or public debt – is money owed by a government at any level (central government, local government, or any government agencies) to individuals, organisations and nations at a particular point in time.

Researchers, academics, ordinary citizens, journalists and politicians make a hue and cry about the rising national debt when it is mentioned because of its implications for inclusive sustainable economic growth and development.

In some periods of Ghana’s development path, its development partners decided not to lend it any further support because of the country’s inability to pay its debts owed them. Reference is made to the ex-Head of State, General Ignatius K. Acheampong who ruled from 13^th January 1972 to 5^th July 1978 and was reported to have allegedly said: “we will not pay the debt”.

Again, during the administration of ex-president John Agyekum Kufour (2001 to 2008), Ghana applied for debt forgiveness through the Highly Indebted Poor Nations (HIPC) Initiative from its development partners when it became evident that the nation could no longer use its limited resources meant for development to repay its debt.

The Business and Financial Times of Wednesday, September 30, 2009, reported that Ghana’s total public debt stock at the end of July 2009 rose to US$8.12billion, equivalent to 54.9% of Gross Domestic Product (GDP).

In December 2008, the public debt stood at US$7.92billion, equivalent to 54.6 percent of GDP.

On January 7, 2009, the late President Evans Atta Mills in his inaugural address to the nation said that Ghana’s overall national debt had hit over US$7billion as at December 2008.

During the same period Ghana’s fiscal deficit (that is the excess of expenditure over revenue) was GH¢2.5billion (about 15% of GDP).

The balance of payment deficit for the period was estimated at about GH¢3.42billion, 18% of GDP.

The Bank of Ghana (BoG) also reported in April 2010 that data on the 2009 budget indicated government’s fiscal operations resulted in a deficit of GH¢2.1billion (9.9 percent of GDP) compared with GH¢2.6billion (14.5 percent of GDP) for the same period in 2008.

The fast-paced growth of expenditures observed in the first quarter of 2010 was driven mainly by the clearance of road and non-road arrears and part settlement of Tema Oil Refinery’s (TOR) indebtedness to the Ghana Commercial Bank (GCB), all totalling about GH¢700million (2.8 percent of GDP).

Ghana’s total public debt stock which stood at US$9,303.7million increased steadily to US$22,737million at the end of August 2013.

Out of this, total external debt amounted to US$10,167million, (i.e. 44.72 percent of GDP) and domestic debt was US$12,569.83million, representing 55.28 percent of the debt stock (MoFEP, 2014).

Adombila (2014) reported that between January 1, 2014, and September 19, 2014, government domestic borrowing through the sale of short-term securities amounted to GH¢26.18billion – up from the GH₵19.03billion it borrowed within the same period of the previous year.

Today, too, though there are conflicting views on the actual amount of money Ghana owes to its creditors (domestic and international), records indicate that the nation’s debt stock has been on the rise and needs to be properly assessed.

JoyBusiness (2020, May 15) reported that Ghana’s total debt stock at the end of March 2020 stood at GH¢236.1billion (equivalent to 59.3% of GDP).

Out of the total debt stock of GH¢236.1billion, US$22.9billion was external debt (representing 31.4% of GDP) and GH¢113.3billion was secured locally (representing 28% of GDP). Adombila (2020) wrote that Ghana’s debt stock had risen to GH¢258.4billion in June 2020.

According to the 2020 African Economic Outlook, at the end of June 2019, total public debt in Nigeria amounted to US$83.9billion – 14.6% higher than that of the previous year. That debt represented 20.1% of GDP, up from 17.5% in 2018. South Africa’s national government debt was estimated at 55.6% of GDP in 2019, up from 52.7% in 2018 (African Development Bank Group, 2020). In addition, over the period 2010 to 2018, sub-Saharan Africa’s average public debt increased by half from 40% to 59% of GDP – making sub-Saharan Africa the fastest-growing debt accumulation continent, far beyond other developing regions (Carneiro & Kouame, 2020).

Similarly, the United States of America has rising national debt. Congressional Budget Office (2018, cited in Yared, 2019) reported that:

 Since United States government debt as a fraction of GDP reached a trough in the mid-1970s, it has been on a generally upward trajectory…it is now approaching levels not reached since World War II and is projected to continue increasing significantly over the coming decade.

McBride, Chatzky &  Siripurapu (2020) also write that the US government’s massive emergency-spending in response to the new coronavirus disease pandemic, COVID-19, was projected to take the US government budget deficit to levels not seen since World War II. This expansion followed years of ballooning debt that totalled about US$17trillion in 2019. As at August 2009, the US national debt amounted to about US$11.7trillion. This figure rose at an average rate of US$3.8billion dollars per day. The American government spends US$452billion annually on debt interest payments.

At the end of 2008, the Centre for Policy Studies in the U.K. reported that the real national debt was actually £1,340billion – which was 103.5% of GDP. In April 2010, the United Kingdom’s public sector net debt was £890billion (or 62% of national GDP). The public sector shared a budget deficit of £9.3billion in April 2009 compared with a deficit of £7.6billion in April 2008. In August 2014, Public sector net debt (PSND ex) was £1,432.3billion, 77.4% of GDP. In 2012 and 2013 net borrowing was £115bn (7.4%, Excluding Royal mail and transfers). In 2013 and 2014 net borrowing was forecast at £105.5bn or 6.5% of GDP (excluding Royal Mail and transfers, Pettinger, 2014).

Anderlini (2014) wrote that China’s total debt-to-gross domestic product ratio in the world’s second-largest economy reached 251 percent at the end of June 2014 up from just 147 percent at the end of 2008. Trading Economics (n.d.) adds that China recorded a government debt equivalent to 50.50 percent of the country’s Gross Domestic Product in 2018. These and many other examples inform us that both rich and poor nations of the world are caught in the web of rising national debt. However, the debt burden of developed nations poses fewer challenges to development relative to that of developing nations, because the developed nations have comparatively high productivity growth rates.

The figures above probably make you question why there seems to be an endless cycle of rising national debts.  The motivation behind this paper is to drum home the need for political parties in developing nations to synchronise effects of the seemly endless cycle of rising national debts and their overambitious campaign promises to the electorate so that they will not derail their nations’ development efforts. In this regard, the rest of this paper considers components of the national debt, why national debts are incurred, causes of the rising national debt, why rising national debts should cause feelings of nervousness, the hope rising national debt gives for national development (if any), and the way forward to ensuring effective debt management for national development.

1. Components and Reasons for National Debt

National debt is divided into domestic (internal) debt and foreign (external) debt. Domestic debt is owed by a nation to its own citizens and is safer than foreign debt because the government owes the debt in its own currencies to its own citizens. Foreign debt, on the other hand, is owed by a nation to foreign investors, foreign governments, foreign institutions (for example, the International Monetary Fund, World Bank and International Development Association, IDA) and other foreign private organisations. The official sources give loans which are attached with conditions that restrict affected nations in their use of the loans. A government’s indebtedness to both official sources and private sources must be based on critical consideration of the rules and regulations that govern the nation’s lending activities and the sources to which it owes its debt, so as to avoid legal implications which may hinder the country’s development objectives.

Government debt arises when government expenditure for a particular year exceeds revenue in that year (technically referred to as budget deficit) and decides to bridge the gap with borrowed funds from domestic and foreign sources. A budget spells out the revenue and expenditure strategies of a government in a particular year. It coordinates anticipated revenue and expenditure in an attempt to ensure efficient use of resources. It is a financial road map for a nation.

Government adds to the debt whenever it spends more than its tax revenue. Each budget surplus also decreases the debt, if it is used to defray the existing debt stock of the country. Acquah-Sam (2020) writes that governments, all over the world, act as an engine of inclusive sustainable economic growth and development; and that spearheads economic activities in their respective countries to improve the welfare of their citizenry.

Governments provide goods and services such as roads, defence, law and order (court systems and police), sports stadia, bridges, habours etc. These essential services are provided at a cost, and usually, a country discovers that it lacks the financial strength to meet its development aspirations – hence, it may decide to borrow from both domestic and foreign sources to augment its limited resources.  Governments mobilise resources for development through tax revenues, profits from state enterprises, the sale of national assets, royalties, grants, loans from the private sector and foreign sector etc. What causes rising national debt?

2. Causes of Rising National Debt

 Many reasons have been advanced to explain the causes of the rising national debt. Among the reasons for rising national debt are as follows:

• Rising national debt may result from very high-interest rates which countries pay on the principal loans they have contracted. The credit-rating of a country determines the interest rates lending agencies are likely to charge it on loans it contracts. The lower the rating, the higher the interest rate to be paid on its borrowed funds, and vice versa. High-interest rates on loans contribute to the swelling-up of national debts.
• Again, the rising national debt is a result of chronic debt burden which causes countries to make provisions in their annual budgets to pay for existing loans. This takes a reasonable percentage of the small tax revenues and export earnings in each fiscal year. They, therefore, resort to more borrowing to enable them to carry out their development agenda.
• Another reason is that governments are transient, so the government that borrows is hardly the same one that repays; hence, a loan obligation may become a burden on a successor government that might not have derived any benefit from the previous government’s loans. This hinders the new government from pursuing its own policies and programmes. To avoid this trap, the new administration resorts to its own borrowing – causing a seemingly endless cycle of borrowing and rising debt.
• Public borrowing is for national development. National borrowing is used to support profitable investments or projects that will yield revenue sufficient to cover the cost of the projects. In most developing nations, external borrowing is used to make up for the shortfalls in much-needed foreign exchange due to inadequate exports earnings. Low export earnings of developing nations result from low prices for their exports on the international markets.

Most commodities exported by low-income nations are primary in nature, and as a result, attract low prices. Again, developed nations give quotas and other forms of trade restrictions that limit the volume of exports from low-income countries, causing revenue shortfalls for development. However, the price of manufactures from developed nations are high. This contributes to a prolonged deterioration in the terms of trade, as explained by Raúl Prebisch (1950) and Hans Singer (1950); causing falling export revenue, falling standards of living, and lower output growth.

• Inadequate savings due to low-income of workers in developing countries make it difficult to mobilise sufficient domestic capital needed for development. This means that countries have to resort to international capital to bridge the gap in capital accumulation and development. For example, the Encyclopedia Britannica (d.) reports that in the late 1940s Secretary of State, George C. Marshall, recommended special U.S. financing opportunities to European countries whose economies and societies had been devastated by the Second World War – so as to create stable conditions in which democratic institutions could thrive, and without which there could be no political stability and peace throughout the world. On April 3, 1948, President Truman signed the Economic Recovery Act of 1948 that became known as the Marshall Plan. Marshall is reported to have said in his speech at Harvard University that:

“The truth of the matter is that Europe’s requirements for the next three or four years of foreign food and other essential products – principally from America – are so much greater than her present ability to pay; so she must have substantial additional help or face economic, social and political deterioration of a very grave character.”

 Countries such as the United Kingdom, Austria, Belgium, Denmark, France, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey and Eastern Germany participated in the Marshall plan and experienced a 15 to 25 percent rise in their gross national products during that period. The plan contributed greatly to the rapid renewal of the western European chemical, engineering and steel industries. Many developing nations also benefitted from similar supports from the U.S. government.

• Rising national debts also result from the activities of overambitious politicians who in their quest for power promise everything that comes to mind to the electorates. In order to fulfil their campaign promises to electorates when they are voted to political offices, they move heaven and earth to secure all kinds of loans to finance their campaign promises – having realised that the nation has inadequate financial capital for development, causing the nation’s debt stock to rise endlessly.
• Corruption, shoddy-work done by contractors, lack of supervision by appropriate state agencies, corrupt state officials, and rent-seekers contribute to the rising national debt. Corruption has contributed to shoddy-work done by contractors who are awarded state projects. Everything done by the government seems to be expensive. People who secure loans for the government are sometimes paid a percentage of the loan for their effort or as negotiation fees. Most of the projects after their execution are not able to withstand the vagaries of the weather and deteriorate before repayment of the loans that financed them takes place. It is not a surprise to see newly constructed railway lines and roads washed away by heavy downpours shortly after their construction. These projects are awarded again on contracts with new funds committed to their execution.

The engineers and state official employed to supervise them are sometimes bribed to certify the projects for payment, even though they may have been poorly-done by the contractors. Osei-Tutu, Badu, and Owusu-Manu (2009) reported that “Conflict of interest, bribery, embezzlement, kickbacks, tender manipulation and fraud are observed corruption practices in the Ghanaian infrastructure projects delivery system. The severity of corruption practices has intensified the search for more innovative means of delivering infrastructure projects that will achieve value for money”.

• Natural disasters, wars, private-sector failures, and pandemics cause nations’ debt to rise. Earthquakes, fire outbreaks, floods etc. cause nations to lose assets; and in attempting to replace and provide reliefs for affected citizens, the government may resort to borrowing that adds to already existing debts. The coronavirus, COVID-19, pandemic has increased the debt burdens of all nations of the world, as attempts are made to revive ailing economies and treat and protect citizens from the disease. The IMF gave a US$1billion interest-free loan to Ghana in 2020 to fight the COVID-19 pandemic in the country. Also, the government of Ghana salvaged the funds of depositors of defunct private sector banks, microfinance companies, savings and loans companies, and investment houses between 2017 and 2019 with taxpayers’ money (Acquah-Sam, 2020). We now turn our attention to why rising national debt should cause feelings of nervousness.

3. Why Should Rising National Debt Cause Feelings of Nervousness?

The issue of the rising national debt has become a concern to many people because of its negative implications for economic growth and development of a nation. Many citizens and politicians over the years have used rising national debts as a sign of non-performance for an incumbent political administration. The negative effects of rising national debt which critics point to include the following:

• Rising national debt may lead to high tax rates and an increased number of taxes as the government attempts to raise revenue to pay off the debt. The effect of increased tax rates is that it reduces productivity and people’s purchasing power due to a fall in their disposable (‘take-home pay’). Businesses also record lower profits due to high corporate taxes, and as a result limit business investments and expansion.
• Rising national debt can also cause inflation since the government spends more than its revenue. Increased government spending increases the demand for goods and services, and without the corresponding increase in the supply of goods and services causes an increase in the general price level. Inflation has a further effect of reducing the volume of a country’s exports of goods and services because foreigners will see the country’s exports as relatively expensive. This will reduce export earnings and cause unfavourable terms of trade.
• Furthermore, the rising national debt will lead to the crowding-out of the private sector (business sector) in the loanable funds market by the government. Governments sell Treasury bills, bonds, etc., to the general public to raise funds to pay for their debts and finance new investments. Generally, governments borrowing instruments are said to be risk-free, because no matter the government in place at any point in time, the debt must be paid to the creditors. This means that individuals prefer government instruments to private sector instruments, especially when the rates are higher than private-sector rates. This reduces the ability of businesses to raise funds from the credit market to finance their operations – this raises the unemployment rate in the private sector and causes a fall in the output of goods and services.
• Another political consideration is that rising national debt at a glance will cause some sections of the population to think that the managers of the economy are mismanaging it and some few people are amassing wealth at the expense of the masses. The possible evils are public demonstrations and ‘coup de ta’. The leaders of military interventionists in developing nations always cite economic mismanagement as the main reason for their actions.
• If the money borrowed is not spent on productive or profitable investments that will generate revenue to pay for its costs, but is spent on sitting allowances; fighting crime, civil conflicts and wars; drinking coffee and tea, and other personal unproductive interests, then the debt is really a burden and a hindrance to national development.
• Rising national debt will eventually discourage domestic investors, foreign investors and foreign governments from investing in the domestic economy. They will not buy domestic securities and undertake direct investments, because of the fear of economic and political instability as well as unnecessary tax payments. To attract foreign investors to buy domestic financial instruments, governments must necessarily increase the interest rates – which negatively affects domestic borrowers and economic growth.
• Some economists are of the view that rising national debt can contribute to an economic crisis if governments do not commit themselves to long-term fiscal management and sustainability of the debt. National debt-financing through printing money results in macroeconomic instability. In the study on macroeconomic effects of monetary financing of fiscal deficits in Ghana over the period 1983 to 2006 conducted by Ali, Assamoah-Cobbiah, Bashiru, Kwabiah, Opoku, & Opoku (2009), they found that monetary financing of fiscal deficit was one of the contributing factors to macroeconomic instability in Ghana. They revealed that a 10 percent increase in monetary financing of budget deficit could lead to a 1.41 percent increase in inflation, 2.1 percent depreciation in value of the cedi and a decline in economic growth by 0.073 percent.

These and many others cause nervousness among various players of national development. We examine the benefits of rising national debts.

4. Does Rising National Debt Give any Hope for National Development?

 One seems to worry about our rising national debt when the figures are quoted, but the rising national debt has positive side-effects which give hope for national development upon a critical analysis of the components of the national debt, why it is incurred, and the causes of the rising national debt. The positive effects of rising national debt include the following:

• One major positive effect of the rising national debt, other things being equal, is that it reflects the major infrastructure projects that are being carried out by the state. The building of schools, bridges, sports stadia, roads etc. involves costs which must be financed. These expensive projects create jobs for the citizenry. If the debt is spent on profitable investment projects, both current and future generations will benefit from the projects.

The former president of Ghana, John Agyekum Kufour, in answer to a question posed to him about the huge national debt incurred by the NPP government under his leadership, insisted that the expenditure was made to build infrastructure for the country and that the critics of his government should travel around the country and see for themselves the infrastructural developments which his government had embarked upon for Ghana.

Most of these projects started yielding benefits for Ghanaians many years ago. For example, the road tolls which users of vehicles pay to government contribute to the government’s revenue mobilisation. The roads also facilitate free movements of goods and human beings for national development and provide job opportunities for the people of Ghana. The sports stadia charge entrance fees to spectators who visit them to watch football matches played by both national and local teams.

The Bui Dam after its construction has contributed immensely to GDP growth through the electric power it generates for both industrial and domestic uses. After him, Presidents John Evans Atta-Mills, John Dramani Mahama and President Nana Addo Dankwa Akufo-Addo have also built the Tema Motorway Interchange, the Ridge Hospital, the University of Ghana Medical Centre, the Kwame Nkrumah Interchange, and Kasoa Interchange projects; and ensured the construction of School Blocks, Affordable Housing Projects, and factories which provide signs of a good future for the nation.

• Another positive effect is that if the debts are raised through foreign currencies, such as the dollar or pound Sterling, it helps the domestic currency to remain strong against foreign currencies. This is possible due to the increased foreign reserves which will be built through the money received from the creditors. The simple demand and supply analysis that determines the price of a currency (exchange rate) is what is being referred to here. At this point we have enough supply of foreign currency, hence we will not need too many units of our domestic currency to exchange for a few of the foreign currencies. This reduces the cost of imports and increases consumer surplus and choices.
• Rising national debt that results from external borrowing is useful because it supplements domestic savings and revenue and helps reduce the government’s tax burden on the people. Borrowing by the government allows the financing of projects with benefits that will accrue in the future, without an excessive reduction in the purchasing power of citizens in the current period.

For example, constructing public facilities such as roads, hospitals and schools can take years to complete; so if these facilities were to be financed immediately by taxation, individuals would be forced to forgo current consumption and saving opportunities equivalent to the entire capital cost of the facility, without any immediate benefits accruing to the nation until the project is fully completed and functioning.

The use of debt finance allows government authorities to tax citizens in the future, as the facility is being constructed, and after it is completed. This in effect spreads the cost over time and allows citizens to pay for the facility as it is being used, rather than at the initial point of construction. Klein (1994) wrote that “Foreign borrowing allows a country to invest and consume beyond the limits of current domestic production and, in effect, finance capital formation not only by mobilising domestic savings but also by tapping savings from capital surplus countries”.

5. The Way Forward

So far, it is clear that rising national debt can be compared to a double-edged sword (thus, it has both positive and negative effects), and both rich and poor nations of the world are caught in the web of rising national debt. As long as governments assume the role of an engine for inclusive sustainable economic growth and development, there is likely going to be an endless cycle of rising national debt. However, governments of developing nations must synchronise effects of the seemly endless cycle of rising national debt and their overambitious campaign promises to the electorate so that they will not derail their nations’ development efforts, because they have comparatively low productivity growth rates.

Governments must pursue debt management policies so as to meet central governments’ financing requirement at minimal borrowing costs. UNITAR (2004) reported that effective debt management requires regulatory frameworks applicable to debt management, institutional arrangements for debt management, and skills for an effective debt management operation such as legal skills. Developed nations of the world must open their markets to low-income countries and offer better prices for their exports so as to enable them raise sufficient export revenues to finance their activities and reduce their debts. There must be another occasion for debt-forgiveness by developed nations to poor nations of the world.

Governments in developing nations must develop infrastructure project delivery-trackers to ensure that monies used to finance projects do not go down the drain. There must be more public-private partnerships in infrastructure development to reduce the state’s burden in the provision of infrastructural projects. Governments should list some capital intensive projects in the rail transport and aviation sectors on major stock exchanges to raise private capital to augment its capital for infrastructure development. Peterson (1984) reported that in the early days of America’s development, railroads attracted a good deal of domestic and European private investment.

The writer is a Senior Lecturer at Wisconsin International University College, Ghana