Research published by the Economic Governance Platform has urged government to limit the participation of non-residents in the domestic borrowing market, as this is partly responsible for the high debt level.
Data on the central government’s fiscal position contained in the Statistical Bulletin report show that since second-quarter of the year, of the GH¢4.1 billion net domestic borrowing by government, non-residents held half the amount – GH¢2billion. Meanwhile, the country’s public debt stood at 76.4 percent of GDP as of July 2021; a position the IMF categorises as high risk of debt-distress.
The Economic Governance Platform report says the high debt situation is partly due to the participation of non-residents in the local borrowing market, which puts a lot of pressure on the exchange rate as it comes with high risk of forex outflows should such holders decide to pull out.
Hence, the report is recommending that government must include steps to end this high risk in the debt management policy.
“The high and increasing domestic debt may be because Ghana allowed non-residents to participate in domestic debt issuance of more than three years maturity. This increasing type of lender comes with its own challenges for Ghana, because debt owned by non-residents can lead to significant outflows of these resources if the cedi deteriorates in value against foreign currencies.
“This means government must ensure the macroeconomic indices, especially the exchange rate, remain fairly stable over the long haul to avoid this kind of problem occurring. Government must also include these factors in its debt management policy to curtail these kinds of risks,” the report stated.
Another suggestion the report made to reduce the impacts of this debt on the economy is to grow GDP, by at least 5.5 percent over the next three years, as the current debt level makes up about 3.5 percent of the country’s annual GDP growth.
“Your GDP is how much your economy grows. So, when you are able to grow your economy, then you have money to service your debt and return the economy to a sustainable level. Anytime government goes to borrow and spend, it does so with the expectation it will increase its growth. So when you increase your growth, then you have more money to service your debt. And when you service your debt, you will return to sustainable levels.
“But if you look at the current level of growth, it is closer to the debt level. For example, if we are projecting the economy to grow at 4.5 percent and you look at our GDP deficit in terms of debt, it is around 3.5 percent. So, we must have a consistent high level of growth to be able to cover our debt,” one of the authors of the report, Bernard Anaba, explained to the B&FT in an interview.
Growing revenue to the benchmark of developing countries was also highlighted in the report as a way of tackling the debt situation. According to the report, the country has a high potential to raise additional tax revenues of about 5-6 percent annually.
Therefore, it adds, if Ghana’s revenues grow in line with a growing GDP and government is able to raise revenues around 19-21 percent of GDP each year, it is most likely the country will obtain a favourable financial rating from the financial world and hence lower interest rates over time, accessing more and cheaper financing opportunities as well.
“The key to debt sustainability in line current thinking would be emphasising the country’s GDP growth and collecting adequate revenues,” the report states.