Financial analysts have advised government to turn to borrowing from the domestic economy as alternative financing – but only in the short-term, since such a move will definitely lead to crowding out the private sector. While at it, government should also introduce programmes that will stimulate the private sector.
According to the 2022 budget, government plans in the short-term to borrow US$750million from international sources with the option of further increasing by another US$750million. In all, total foreign financing and exceptional financing (use of IMF Special Drawing Rights [SDR] allocation) will amount to GH¢9billion, representing 1.8 percent of GDP.
But the World Bank’s Global Economic Prospect report on sub-Saharan Africa has indicated that the country will have a tough time borrowing from the international market this year due to its high debt portfolio.
It is against this background that financial analysts are urging government to turn to the domestic market, which appears to be another available option – but be wary of its impact from crowding out the private sector.
“The opportunity available on the domestic market for borrowing, though it seems bigger, is limited as well. By going to the domestic market, government will have to choose between its own programmes and policies as against the crowding out effect it will pose to businesses.
This is because government will eventually stifle access to funds for the private sector. It will then make buying government securities in terms of bonds, Treasury bills etc., that bear low risk seem more lucrative than putting funds into businesses which bear some level of risk,” an investment analyst, Abena B. Brigidi, said in an interview with the B&FT.
She said government must also put in place policies that do not give unfettered access for non-resident investors to repatriate profits; as these will ensure a lot of funds are available to reinvest into the economy.
Also commenting on the issue, Chief Executive Officer-Dalex Finance, Kenneth Thompson, said the World Bank report set the tone that it is time for all stakeholders to tighten their belts; and also a call on government to be prudent with expenditure. He noted that the domestic market has the capacity to finance government, but only in the short-term.
He urged government to focus on increasing income and cut down on expenditure, and also consider the private sector’s role in its efforts to resuscitate the economy.
A former Technical Advisor at the Ministry of Finance, Dr. Sam Mensah, also reiterated the point that the country needs to grow its economy in such a way it supports the private sector as well as generates more tax revenue for government.
He noted that if the economy is growing it will give some room for the private sector to grow; and it will be much easier for government to sell domestic bonds without crowding out the private sector.
“Government needs to grow the economy. If government generates more tax revenue, it borrows less; and therefore its financing needs can increasingly be met by the domestic market. Currently, there is quite a demand for domestic bonds because of the pension industry – which has developed and a lot of pension managers want to buy government bonds for the pension funds; therefore, the demand is high,” he said.
Ghana’s Public Debt
The country’s public debt as of September 2021 stood at GH¢341.8billion, representing 77.8 percent of GDP. Of this amount, the external debt component of GH¢163.7billion represents 37.2 percent of GDP, data from the Bank of Ghana show.