Development Discourse: Sovereign rating and the justification for E-Levy

Standards and Poor

Two weeks ago, Standards and Poor, one of the world’s leading credit rating agency lowered Ghana’s long-term foreign and local currency sovereign credit ratings to B- from B.  Despite the downgrading the publication by S & P adjudged Ghana’s economy as stable. This implies Ghana’s economy is not on its knees as some people think but it is among one of the fastest growing economies in the world.

The Ministry of Finance and explained in its website that the downgrading of Ghana’s credit rating was largely due to the COVID-19 pandemic-related expenditures, which negatively affected Ghana’s fiscal policy stance. According to the release, COVID-19 pandemic-related expenditures was aimed at providing relief to many Ghanaians severely impacted by the pandemic.

These necessary interventions, led to significant unplanned expenditures, such as subsidies on water and electricity targeted at vulnerable households during the lockdown period. The statement said despite these interventions, Ghana’s economic fundamentals remain strong, and this is reflected in the positive narrative on how Ghana has managed the economy under the pandemic.

Purpose of credit rating

Sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.  Obtaining a good sovereign credit rating is usually essential for developing countries that want access to funding in international bond markets.

Results show that sovereign ratings are mostly influenced by per capita income, government income, real exchange rate changes, inflation rate and default history. When a country solicits for a sovereign credit rating it signals the intention to borrow from the global market. A sovereign credit rating serves as a foundation in financial monitoring and acts as an information equalizer in investment decisions of donors and lenders.

More critically credit ratings aim to assess the debt issuer’s default risk and help investors to determine the risk premium they should demand to compensate for this default risk. Having a positive credit rating is instrumental for attracting (foreign) investments because many investors prefer to lend to countries that are managing their economies efficiently. No doubt credit rating agencies play an economically meaningful role in reducing financial fragility in two ways.

First, the agencies’ credit watch procedures reduce monitoring costs. Second, credit ratings play a crucial role in the investment allocation decision of institutional investors like pension fund managers who are bound by regulatory constraints. The importance of sovereign credit ratings is further highlighted by the fact that foreign currency debt ratings encourage financial sector development and are a bate for attracting capital flows.

Furthermore, sovereign credit ratings serve as an important channel of international finance in poor countries like Ghana, and this contagion effect is magnified during crisis periods such as COVID 19. Questions, however, remain as to why rating organisations have assumed such powers to determine which country is credit-worthy and which country is not, based on factors that sometimes fail to consider country specific situation.

While the use of a country’s debt profile as a basis for credit rating is understandable, room should be made for crisis like COVID 19, which compelled poor countries to increase pandemic-related public expenditure. This is the situation Ghana finds itself, though some people are downplaying the havoc COVID 19 has wreaked on Ghana’s economy

Debt levels

Undoubtedly, Ghana’s rising debt levels and the suffocating interest payments are putting the economy at growing risk of a debt crisis. While strong global commodity markets mean Ghana’s, economy is expected to grow at a respectable 6% this year, the threat of another double-digit fiscal deficit could worsen the debt burden.

That budget gap is estimated to grow at $6 billion (GHS 37 billion). As a result, debt as a share of gross domestic product (GDP) could reach 85%, though it is still around 70%. We must admit that Ghana’s biggest economic headache is high interest payments, which are projected to absorb 46% of the government’s revenues according to credit rating companies. The government plans to issue just over $4 billion worth of bonds in its local cedi currency in coming months to help pay its bills. But this may not be enough, looking at the quantum of investments Government plans to undertake.

Fiscal consolidation

A way out of this debt crunch is for the Government to focus on fiscal consolidation by embarking on an aggressive revenue mobilization drive. The government has projected that its deficit, including energy and financial sector costs, could drop to 7.4% in 2022, but some economic and financial analysts think it is more likely to be around 10%.

In a news conference in December 2021 after the presentation of the 2022 budget to Parliament. Finance Minister, Mr. Ken Ofori-Atta said the government was committed to fiscal consolidation and debt sustainability in its economic recovery.

According to him despite the financial debt other economic indicators are strong. The Finance Minister’s positive assessment of the economy can be viewed against the background that government is meeting its public sector obligations, such as paying public sector wages and investing in major infrastructural development.

In spite of the strong fundamentals there is a pressing need for the Government to find a long-term solution to revenue generation and debt repayment. On this score, I totally agree with the notion that Ghana cannot continue to depend on donors to finance her development.

If this was the approach in the 80s and 90s, the same approach cannot be used in 2020s. No sovereign country, which hopes to industrialise should continue to depend on external borrowing and donation. The fact is that the lenders and donors do not hope that the poor countries will wean themselves from borrowing at high interest rates.

Justification E-Levy

The Government’s innovative and justifiable response is the introduction of the E-levy revenue stream, which is expected to widen the tax net and complement the traditional sources of revenue. Out of Ghana’s estimated active workforce of 14 million, only 2.3 million people are paying taxes. This translates to the fact that Ghana has since depended on a few people to pay direct or indirect for the management of the economy.

A chunk of the revenue generated from this traditional source of income go into paying public sector wages and salaries of 600, 000 workers on state payroll. The political capital the opposition is seeking to gain from the E-levy policy in a way betrays their lack of appreciation of emerging economic issues post-COVID.

The fact is that the dynamics of economic management have changed since 2019, when COVID devastated even the developed economies. Now every country is looking for innovative and home-grown solutions to its economic and social problems. As a result, the Government’s resort to E-levy is a prudent decision that should have attracted national consensus. Sadly, in a country that is ideologically polarised, nothing less was expected than what is unfolding in Parliament.

Town Hall meeting

Somehow, the Government put the cart before the horse, by tabling the levy in Parliament before resorting to public education. It appears the Government is underestimating the impact of public education and public opinion on policy making.  Henceforth the Government’s overreliance on public goodwill should never be taken for granted, especially when it does not have the working majority in Parliament.

Probably sensitised by the avowed decision of the opposition to stop the E-levy, the Government started a series of Town Hall meetings on January 27, 2022. The first meeting was held at Koforidua in the Eastern Region. Hours to the event President Akufo-Addo assured the public that revenue accruing from E-levy will be used to undertake massive development. “The E-levy will ensure that we have revenue to sustainably invest in entrepreneurship, youth employment, security, digital & road infrastructure.”

During the event, the Minister of Communication and Digitalisation, Mrs, Ursula Owusu-Ekuful pointed out that so long as Ghana continues to  depend on loans, foreign powers will continue to dictate the pace Ghana’s  According to her, If Ghana does not wean herself from seeking aid from other courtiers, foreigners will continue to dominate Ghana. She emphasized that for Ghana to be truly independent, she would need to increase domestic revenue mobilisation to undertake the needed development. “We need to find the way to increase domestic revenue mobilisation,” she added.

The return to IMF

The backward and awkward response from the opposition is that the Government should return to the IMF. In fact, those pushing the Government to take Ghana to IMF’s slaughter house, perhaps, demonstrates lack of a clearer understanding of how IMF works. Records indicate that apart from Western Germany which presented its local plan to IMF for support, in other instances the IMF offers bitter policy prescriptions as conditions.

With the Marshall Plan, West Germany rose from its rubbles after World War 2, to become Europe’s biggest economy prior to the reunification. On the contrary, there is arguably no single African country that the IMF has helped to industiralise. Therefore, I shuddered when I heard those seeking to become an alternative Government suggesting a return to the IMF.

When in 2014 the John Dramani-led administration offered Ghana’s economy to the IMF after “eating the bone to the marrow”, what good thing came out of it. The so-called policy credibility only gave Ghana $950 million to boost Ghana’s foreign reserves to move it to 2.81 months of import cover.  Currently, Ghana import cover is $9.9 billion (4.9), compared to 2.81 import cover during the previous era. Economic analysts say the current 4.9 is very historic, coming on the heels of COVID 19.

Repercussions of going to IMF

The repercussions of taking Ghana to IMF in 2014 were dire for the economy. First, there was a net freeze on public sector employment.  Consequently, doctors, nurses, teachers, agric extension officers and other professionals that are critical to economic were left unemployed for five years. Besides, subsidies on all public interventions, education, healthcare road infrastructure etc were slapped on Ghana.  The Ex-president John Dramani Mahama is record as saying IMF only provides bitter pills.

Secondly, Ghana had no option than to borrow at high interest rates. Records indicate that Ghana took some loans with interest rates as high as 19%. These uncontrolled borrowing and the attendant interest rates largely contributed to the current debt hanging on our necks. Between 2012 and 2016, Ghana’s debt profile increased by 240%.  Yet, these same politicians are advocating for a return to the IMF. In fact, Ghana has gone to the IMF 16 times, most of it under the PNDC and NDC regimes. But IMF’s policy prescriptions did little to change the structure of our economy.

IMF always insists on cutting public expenditure. But Ghana cannot afford to cut public spending just because of debt burden. Of course, while I am not in favour of reckless spending, it is incumbent that Government should continue to invest in socially beneficial projects. For a reminder   IMF supplies fish to its clients and fails to teach its clients how to fish.

In the ensuing debates on the future of our economy I encourage Ghanaians to opt for E-levy against borrowing at high interest rates. The reason is simple, loans come at high interest rates, but E-levy comes at zero interest rates. At the current level of our development Ghana can no longer to be overly dependent on aid and loans.


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