In recent times, some political analysts, economists and financial experts, including the former Minister of Finance, Hon. Seth Terkper have been calling on the Nana Addo’s administration to resort to the IMF for a bailout.
The call for the bailout was as a result of the fact that, Foreign-Currency Issuer Default Rating (IDR) has been downgraded to “B-” with negative economic outlook from an earlier “B” rating by the International Rating Agency Fitch.
According to the Fitch report, the downgrade of Ghana’s IDRs and Negative Outlook could affect the country’s ability to raise debt on the international capital markets.
Just about a week ago, Bloomberg in an article captioned “Ghana Debt Moves Deeper into Distress as investors lose Patience”. In that article, Bloomberg stated Ghana’s end of fiscal year, 2021 debt to GDP ratio was 81.5percent.
The Ministry of Finance swiftly objected to Bloomberg’s analysis and, instead, stated that the country’s debt per provisional nominal debt to GDP, as at the end of November 2021 was 78.4percent. The question most economists, analysts and political actors are asking is whether or not a debt to GDP ratio of 78.4percent is sustainable for an emerging economy like Ghana.
Debt sustainability
Debt sustainability is key to the external debt management strategy. In fact, according to Development Finance international, debt sustainability is defined as the ability of a country to meet its debt obligations without requiring debt relief or accumulating arrears. Omoruyi (2016), stipulated that public debt whether domestic or external is sustainable where the government is solvent.
To him, to be solvent means that, the present value of government disbursements including inherited debt amortization, interest payments etc. must not exceed the present value of future revenues. This implies that, a country’s primary balance should be able to cover its existing public debt.
As much as an economy is better able to generate sufficient inflows to meet debt repayment obligations without sacrificing the overall growth of the economy, debt may be deemed beneficial to driving developmental projects. Unfortunately, Ghana’s debt sustainability is questionable taking into consideration the economic trajectory of the country.
Ghana’s debt stock and the issue of debt sustainability
Ghana’s debt levels have risen in recent years. As at November 2021, the provisional nominal debt to GDP ratio was 78.4 percent. According to the IMF, the rise in the debt levels is largely due to one-off expenditure, a growing interest bill, and weak domestic revenue mobilization. In fact, the Joint World Bank-IMF Debt Sustainability Report, 2019 stated that, Ghana is at a high risk of external debt distress.
The report further stated that Ghana’s external debt service continues to absorb a third of government revenue. According to the 2021 budget statement and economic policy, Ghana total debt stock stood at GH¢291, 614.5 million, as at the end of the fiscal year, 2020, representing 76.1 percent of GDP. Out of the total debt stock, the domestic stock accounted for 51.4 percent whiles external debt accounted for 48.6 percent.
The budget statement further indicated that, as a percentage of GDP, the external and domestic debt represented 37.0 percent and 39.1 percent respectively. In 2018, however, the public debt stood at GH¢173,068.7 million, representing 57.9 percent of GDP and in 2019, it stood at 62.4 percent.
Per 2019 budget statement and economic policy, a large part of the 2018 debt additions resulted from the financial sector bailout programme initiated by the government. It is against this back that the government slapped 5 percent financial levy tax on the banks. It is my expectation that such a levy shall be applied prudently in order for the government to close the fiscal gap.
I am of the view that, the issue of high debt levels will not go down within the shortest possible time. This is due to the fact that, Ghana’s debt stock from 2010 to 2020 shows an increasing rate. This is shown in the diagram below. What is critical, therefore, is the ability of the managers of the economy to apply such funds in a manner that it will generate sufficient inflows so as to meet interest and principal payment obligations as and when they fall due.
In fact, the IMF in its April, 2020 Fiscal Monitor report indicated that Ghana’s debt stock is expected to hit 81.5 percent of GDP by the end of 2021. The Fund further predicted that Ghana’s debt to GDP ratio will increase to 83.2 percent for the fiscal year, 2022. Projections were further made into the fiscal years 2023, 2024, 2025 and 2026.
According to the IMF, by 2023, 2024, 2025, Ghana’s debt stock is expected to be 84.8 percent, 86.0 percent, and 86.6 percent respectively. In the fiscal year, 2026 it will be around 85.5 percent, that is, a marginal reduction compared to the 2025 projection. It is my expectation that government’s loan profiling strategy will actually ensure that we do not get to the level of IMF projections. We need to work out the equation very well so that, we do not suffocate the economy going forward.
IMF Bailout in 2015
By 2015, Ghana’s economy was in trouble, hobbled by widening current account and budget deficits, rampant inflation, and a depreciating currency. Credit dried up as interest rates rose and banks’ bad loans piled up. At the root of Ghana’s woes was out-of-control government spending, largely to pay salaries of an overgrown civil service (IMF, 2019)
As a result, Ghana turned to the IMF for a $918 million loan to help stabilize the economy. IMF advisors, working with the Ghanaian government, developed a three-part program:
- Restore debt sustainability.The government limited hiring and wage increases and eliminated subsidies for utilities and petroleum products.
- Strengthen monetary policy. The authorities agreed to gradually end central bank financing of the budget deficit, and to fortify the inflation-targeting regime.
- Clean up the banking system. An asset quality review revealed significant under-capitalization. Some banks were recapitalized, and the Bank of Ghana used its newly enhanced authority to wind down insolvent lenders.
Is Ghana’s economy ripe for IMF bailout?
Considering the current state of the economy, more significantly, the lack of funds to finance some of the innovative policies outlined in the 2022 budget statement. The government proposed the introduction of the E-Levy as a critical catalyst to drive the YouStart initiative which is aimed at promoting youth entrepreneurship and job creation.
The Finance Minister also indicated that revenue from the E-Levy will support road infrastructure and equally help the country to pay its debt. From the Finance Minister’s point of view, the E-Levy is the game changer.
It is against this back ground that experts and economic analysts had argued that if the country cannot survive without the E-Levy, then, to restore credibility and confidence in the eyes of the investor community, the country must resort to the IMF for bailout. Indeed, the economic conditions which necessitated the IMF bailout in 2017 is strongly showing the same signs in the economy.
Conclusion
In conclusion, I will like to suggest that we beef-up domestic revenue mobilization so as to meet the projected target of Ghc 89.1 billion, that is, 17.9 percent of GDP for the fiscal year 2022. We need to find a way to minimize corruption and waste in public financial management. The country’s economic conditions are not favourable for the average citizen and therefore, the management of the economy must work hard to create resilient, robust and prosperous economy for all.
>>>The writer is a Development Economist and Chartered Financial Analyst. Daniel is the Chief Economist at the Policy Initiative for Economic Development (PIED Africa). He also the Director of Research and Analysis, B&FT. Currently, appointed as the President of the Chartered Institute of Financial and Investment Analysts, Ghana. He can be reached on email: [email protected]. Tel; 0244 476376/ 0201939350
