Ghana’s public finances are deteriorating very fast. At the root of the present difficulties is a fiscal policy characterised by weak domestic revenue mobilisation and rapid expenditure growth driven by budgetary rigidities and new spending programmes. This type of fiscal policy has been pursued for nearly a decade now, and has produced huge deficits and a rapid debt build-up – causing a sharp and persistent increase in debt service spending that is currently weighing down the nation’s finances.
If there was any doubt about this fact before, there can be none now – given recent developments concerning Ghana’s sovereign bonds and international investors’ assessment of the country’s creditworthiness. According to international investors, Ghana’s sovereign bond prices have fallen sharply since turn of the year, recording the worst performance among emerging market bonds.
Falling bond prices imply rising bond yields, which simply means investors are demanding higher interest rates to hold Ghana’s bonds or lend fresh money to the country. Thus, Ghana’s sovereign debt is “considered distressed”, with investors losing confidence in government’s ability to restore public finances to a stronger footing.
The alarm over Ghana’s fiscal situation has now been deepened, since on January 14 Fitch, the ratings agency, downgraded the country’s long-term foreign-currency issuer default rating to ‘B-‘ from ‘B’, with a negative outlook. Fitch basically said that the likelihood of Ghana defaulting on its long-term external debt had increased because of the deteriorating fiscal situation and weak credibility of government’s fiscal consolidation plans. The downgrade will lead to higher borrowing costs at a time when the country is already saddled with one of the heaviest debt service burdens in the world.
But what has caused such a rapid deterioration in the Ghanaian Economy? Following the Highly Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI) debt reliefs in 2001-2006, Ghana enjoyed a period of high economic growth and relatively strong domestic revenue mobilisation. In 2005-2008, annual real GDP growth averaged 6.4percent, while real growth of total government revenue and grants averaged 7.1percent, surpassing real GDP growth. In 2009-2012, average real GDP growth soared to a record rate of 9 percent.
The fiscal policy strategy that was implemented during this period prioritised domestic revenue mobilisation, which led to average real growth of total revenue and grants of 18.7 percent – more than double the record high average real GDP growth rate.
Government prioritised domestic revenue mobilisation as its core Fiscal Policy Strategy because it is a practical step for a country to rid itself out of aid-dependency.
This is because domestic revenue mobilisation is a process through which a country raises revenue from its citizenry, and spends such funds on national developments. The funds mobilised in this way do not attract any interest payment.
As a result, there is no substitute for domestic revenue mobilisation because it protects and strengthens national sovereignty. Unfortunately, this fiscal policy strategy appears to have been abandoned in favour of Eurobond financing barely a decade ago.
For almost a decade now, both real GDP and real revenue growth rates have been falling – with average GDP growth slumping from 9 percent in 2009-2012 to 3.9 percent in 2013-2016. The real growth of total revenue and grants also plummeted from 18.7 percent in 2009-2012 to 3.8 percent in 2013-2016.
This meant that the real growth of government revenue, which had been more than twice the rate of economic growth in 2009-2012, was now trailing a much lower real GDP growth rate. At the same time, the issuance of sizeable Eurobonds in the international capital markets for deficit financing became a key feature of the fiscal policy strategy pursued in the period.
Whereas by the end of 2012 Ghana’s outstanding Eurobond remained the US$750million debut bond issued in 2007, the value of outstanding Eurobonds increased to US$3.88billion in 2016. The sales of these Eurobonds contributed to rapid debt accumulation in the period.
This fiscal policy strategy that was marked by weak revenue mobilisation alongside dependence on Eurobond financing continued after 2016. In 2017-2020, real GDP growth stood at 5.3 percent while real government revenue growth averaged just 4 percent, thus continuing to trail the economic growth rate of 9 percent and remaining substantially lower than the 18.7 percent rate recorded in 2009-2012.
Meanwhile, more Eurobonds were issued – in double and triple tranches and with larger sizes – to finance large fiscal deficits. This increased the stock of outstanding Eurobonds to US$10.22billion by 2020 from US$3.88billion in 2016. In 2021, and the total interest paid on these bonds exceeded US$800m. In the same year, additional Eurobonds worth US$3.025billion were issued, which – minus refinancing of previous bonds – increased the stock of outstanding bonds to US$13.14billion.
With the decelerating revenue growth a decade ago, budget rigidities intensified and were
aggravated by new spending programmes that increased borrowing and debt service
obligations. The proportion of public revenue devoted to employee compensation and
debt service, which stood at 65.3 percent in 2012, surged to 99.7 percent in 2019. This put the public finances in a precarious state before onset of the COVID crisis, and in 2020
government needed to spend 121.4 percent of its revenue to fund these two items alone.
Debt service spending has seen such a dramatic growth that it has occasioned, justifiably, much of the present anxiety over the fiscal situation. Whereas in 2009-2012 government required, on average, 15.4 percent of its annual revenue to pay debt interest, the ratio worsened further to 37.3 percent in 2017-2020.
The latest available data suggest that government devoted a record 46.2 percent of revenue to interest payments in 2021. For overall debt service spending – that is, interest plus amortisation – this consumed 70.1 percent of revenue in 2020 and remained above 65 percent in 2021. These rates are simply terrifying, considering that just 19.5 percent of revenue was needed for debt service in 2012.
This story of rapid fiscal decline fundamentally exposes a fiscal policy strategy pursued for almost a decade that has come apart at the seams and urgently needs to be reset. Clearly and simply – we have a crisis on our hands. A walk on the Broad Road is destroying the country.
A change in fiscal policy strategy from domestic revenue mobilisation to Eurobond market revenue mobilisation had lots of benefits, and was therefore attractive to government. Large proceeds were usually accumulated much easier and faster than could be achieved on the domestic market.
However, Eurobond funds – no matter how large the proceeds or how fast they were accumulated – were non-concessional loans and therefore expensive. We are now at a point when the chickens are coming home to roost and our debtors are at our door – something must be done, and done immediately. It is important to remember that a failing economy has wide-reaching implications that trickle down throughout a nation. A broken economy leads to a broken society; and, as we have seen recently throughout our region, it is the greatest threat to national security – and which can all too quickly lead to social unrest and political instability.
The change in the country’s fiscal policy strategy in relation to revenue mobilisation is like the Bible passage in Matthew 7 v 13 that states: “Enter through the narrow Gate. For wide is the Gate and broad is the Road that leads to destruction, and many enter through it”. It is clear that we abandoned the narrow Gate, which was the domestic revenue mobilisation Gate; and chosen the Road that leads to the Eurobond market revenue mobilisation broad Gate. Walking through the broad Gate has led to destruction, and we should therefore get back to the narrow Gate without any further delay. Walking through the narrow Gate again will bring recovery, prosperity and dignity.