The Bank of Ghana Governor, Dr. Ernest Addison, has thrown his weight behind discussions which call for putting a ceiling on borrowing, given deep concerns about the country’s public debt after the World Bank released a damning report on the economy.
According to the World Bank’s Africa’s Pulse report (October 2022, Volume 26), Ghana’s public debt is set to hit 104.6 percent of GDP by end of the year, automatically putting the economy into the debt-distressed category and further making the debt situation unsustainable – meaning the country will no longer be able to fulfil its debt obligations, even domestically.
It is against this background that Dr. Addison says he supports discussions on capping borrowing to ascertain the country’s readiness for such a policy.
“I think this is something that could be looked at. If you look at the European Union, they had a criteria which had a debt-ceiling. And in our own convergence discussions with the West African common currency, we were discussing a debt-ceiling, so it is not unusual to set caps for attaining certain objectives. If Ghanaians think we have reached a point where we can cap debt, the debate can be had and we will look at the pros and cons of that type of decision,” he said during an interaction with the press in Accra last Thursday.
Various economists and policy think-tanks have called on parliament to spark conversations on debt-capping and follow up with a law. One of such organisations is the Institute of Economic Affairs (IEA).
“We are inclined to suggest that parliament considers introducing a borrowing or debt-ceiling in the annual Appropriations bill. This will be in addition to the existing expenditure ceiling that is imposed by parliament for every budget – which more often than not is breached with impunity.
“If government wants to borrow beyond the initial borrowing – or debt-ceiling, it will have to come back to parliament for approval as prevails in the US. This suggestion is to rein-in the debt, which otherwise risks ballooning and overwhelming the budget in the form of escalating interest payments,” the IEA stated when providing inputs for the 2022 budget.
The World Bank’s report
According to the Africa’s Pulse report, debt is expected to jump to 104.6 percent of GDP in Ghana from 76.6 a year earlier – amid a widened government deficit, massive weakening of the cedi and rising debt service costs. It further said the country’s debt is expected to remain elevated at 99.7 and 101.8 percent of GDP in 2023 and 2024 respectively.
The mounting debt situation – with no concrete revenue measures in place to pay back, coupled with a weakening currency – has raised further red flags from investors, leading to loss of access to the international market.
Currently, the country’s local and foreign currency ratings have been downgraded from B-/B to CCC+/C with negative outlook from S&P rating agency, and ‘CCC’ to ‘CC’ by Fitch.
The country is now seeking a US$1.5billion assistance from the International Monetary Fund (IMF) to shore-up public finances and regain access to credit markets.
The World Bank is however warning that the situation could get worse, especially with no access to the international bond market.
“Debt levels and/or vulnerabilities remain high in the region, with no sign of significant improvement. The fiscal consolidation process adopted by many countries following the pandemic crisis was postponed or at best softened. This suggests that countries have little scope to manoeuvre, given that they do not have any fiscal space.
“The situation could worsen, especially for countries which lost access to the credit market and are in, or at risk of, debt distress. The international community needs to find more adequate ways to resolve the issue of debt restructuring. The current resolution mechanisms are proving to be inadequate for effectively addressing a potential debt crisis, and additional instruments may need to be set in motion. If not addressed, debt dynamics could escalate into a full-blown crisis… setting countries even further back,” the report stated.