The International Monetary Fund (IMF) has warned that Ghana’s growing debt presented elevated risks to the economy, confirming earlier concerns by financial analyst and Member of Parliament (MP) for Bolgatanga Central Constituency, Mr. Isaac Adongo, that the government needed to reduce the pace of debt accumulation to safeguard the economy from crashing.
In its Article IV review statement issued on July 19, the fund said the risks to the country’s ability to repay had increased, projecting that the ratio of the debt-to-gross domestic product (GDP) would hit 83.5% at the end of 2021.
Last year, the country used about 87 percent of total tax revenue to service debt with estimates showing that debt service expenditure would consume more than 91 percent of tax revenue this year.
The fund stressed that urgent steps were needed to mitigate the growing risk associated with the continuous rollover of maturing debts and restore debt sustainability in the short to medium term.
The position of the IMF mirrored earlier concerns by the Deputy Ranking Member of Parliament’s Finance Committee as expressed in a public lecture on the economy in June 2021 that, debt growth had assumed a sustained upward trajectory when President Nana Addo Dankwa Akufo-Addo and Vice President Dr. Mahamudu Bawumia took office in 2017.
“An amount of about GH₵180 billion was added to our debt stock within a space of four years, an indication that Akufo-Addo and Bawumia have accounted for more than 60% of Ghana’s debt stock since independence,” he said.
The Chartered Accountant said, beyond the quantum of the debt being an issue, government had failed to boost the export earning capacity of the economy as buffer to repay the foreign currency-denominated loans.
He said a recent IMF and World Bank Debt sustainability analysis of Ghana showed that Ghana had breached the threshold of this measure for debt sustainability, signifying heightened external vulnerability. He also noted that the country lacked adequate reserves at the Bank of Ghana to cover for debt held by non-resident investors.
“As a rule of thumb, a country must have at least $2 for every dollar of short-term capital holding of non-resident investors. However, over the last couple of years, declining net international reserves of Ghana has resulted in breaches of this prudential foreign currency reserve requirement.
“By the end of 2019, Ghana’s net international reserves could hardly cover for 50 cents of every $3 short-term capital holding of non-resident investors”.
You will recall that in 2019, significant reversals of portfolios of domestic bonds held by non-residents in Ghana and mounting uncovered-auctions led to excessive depreciation of the cedi as our buffers were inadequate to stem the huge liquidity demands in the forex market,” he said.
In the CFR public lecture, the renowned legislature added that the rising levels of fiscal deficits, low revenue generation and high levels of debt service resulted in rising primary balance deficits, which meant that the country has been borrowing to pay interest costs.
Mr. Adongo also noted that the ability of the economy to sustain the pace of the debt accumulation was also worrying.
He said Ghana’s debt-to-GDP ratio showed that while its public debt was growing at a geometric progression, the economy was growing at an arithmetic pace and that it was unable to anchor debt sustainability.
“In order words, we are not growing the income earning opportunities of Ghanaians enough such that Ghana can generate the pool of income necessary to ensure that we can generate significant resources from the economy to pay for and service these debts,” he said.
He said it was of grave concern that both the government and the IMF were predicting that the debt-to-GDP ratio would hit 86% in 2024 rather than falling in line with prudent economic management. Just like the IMF, Mr. Adongo was also concerned about the chuck of scarce revenue being used to service the growing debt.
“Another important measure of the quality of Ghana’s public debt is our ability to service both the interest and principal payments when they fall due. A key measure of this risk of default is the proportion of tax revenue we use to pay for debt service.
Do we have enough room or fiscal space based on the public debt service, size of the economy in relation to tax, non-tax and other domestic revenue mobilization?” he asked.
“Ghana, which used to spend about 66% of its tax revenue to service its debt, spent about 72% of its tax revenue in 2019 to service its debts, leaving only 28% of tax revenue to fund critical infrastructure. This was obviously not induced by COVID-19. By the end of 2021, Ghana is projected to use about 91% of its tax revenue to pay for debt service, leaving only 9% for other critical infrastructure,” he said.
He added that, it was worrying that the debt growth was not commensurate with investments in public infrastructure and other productive ventures.
He said it was ironical that while the debt continued spiking, the road network had seen limited improvements, children in SHS were running a ‘traffic light-like system’; new hospitals have not been built; the old ones are ill-equipped and health workers are poorly remunerated to deliver fit-for-purpose health care.
The second issue of grave concern is how the elephantiasis-like public debt is expanding the size of the economy and creating a pool of national income for increased revenue mobilization of tax and non-tax revenue to service the debt, amortize the it when due and still leave a reasonable fiscal space to fund critical national development,” Mr. Adongo said.
He noted that while countries all over the world ensured that government’s borrowing programs were aligned to growing the economy and funding growth-enhancing expenditures such as infrastructure to give the country and its citizenry a chance at enhanced livelihood and economic well-being through jobs, improved social service delivery and enabled private sector, the government of Nana Addo and Dr. Bawumia was only borrowing to consume and fund corruption and corruption related activities.
On the solutions, Mr. Isaac Adongo said the country must be prudent and fast to “avert a looming market access complication on the international capital market as investors begin to protect their monies from potential default.”
“Beginning with the 2021 mid-year budget estimate, government must reign in its expenditure by rationalizing its spending and resist the temptation to request supplementary appropriations for additional expenditure, he said.
He also called for aggressive and progressive revenue mobilization efforts by the government “by looking to spread the burden of revenue generation proportionately. Efforts should be made to tighten the tax exemption regime and check the rising leakages of customs revenue at the ports.
“Government must fast-track fiscal consolidation and significantly reduce the appetite to borrow. It must do this to reign in debt levels and the debt service burden on the economy. Government must prioritize creating fiscal space encumbered by excessive debt service to free up the economy from the shackles of debt to a path of sustainable growth. The market expects to see a genuine resolve to bring back confidence and provide comfort to investors,” Mr. Adongo said.
The Bolgatanga Central MP also said he was aware that dealing with these recommendations may require very tough decisions that should be immediate and drastic.
“This may be politically difficult to initiate and implement. To achieve this, I call on Government to seek help from Ghanaians and begin to engage financial and natural resource governance experts to engender trust. National dialogue and consensus around the critical national issues and solutions should be held immediately for the critical stakeholder buy-in.
Ghana is not in normal times and we need to muster the political will to pursue the most difficult efficacious policy shifts to save our country,” the financial analyst stated.