The Institute of Economic Affairs (IEA) is leading efforts to introduce a legislative cap on the amount of national debt that can be incurred by the Ghanaian Treasury, and is courting the support of principal stakeholders to see it come to fruition.
The public policy think-tank is seeking an instrument that will impose and strictly enforce a ceiling of five percent of Gross Domestic Product (GDP) on the fiscal deficit, in addition to a five percent cap on the previous year’s revenue of the Bank of Ghana’s fiscal support to government – arguing that both elements have significant debt implications.
“The IEA is spearheading the passage of legislation to cap government’s borrowing. That is the only way to avoid reckless borrowing and uncontrollable indebtedness. The Institute calls on key stakeholders – including Parliament, Bank of Ghana, TUC and Civil Society Organisations (CSOs) – to support the process,” stated its Director of Research, Dr. John Kwakye.
The Institute also disclosed in a communique on the matter that it has, as part of the CSO Economic Governance Platform – to which it belongs, made this suggestion to the International Monetary Fund (IMF) team to consider as part of negotiations with economic managers of the country in regard to a possible programme.
The moves come after successive recommendations by the IEA on the subject as concerns over national public debt began to mount, especially in the last 18 months.
In the commentary of its expectations ahead of the 2022 Budget presentation, the Institute called for the imposition of a cap that could be incorporated into the Parliamentary Appropriations Act – which approves government’s annual total spending; or have it introduced as a rule in the Fiscal Responsibility Act in addition to the existing deficit rule, over concerns that the borrowing mandated to fund budget deficits seems to be invariably breached with impunity.
According to the IEA: “It is necessary to tie the hands of the finance minister and insist that any additional borrowing by him, beyond the budget estimates or the new ceiling, should be subject to approval from parliament, just as pertains in the United States. This is the only way to rein in our debt and keep it at a sustainable level on a durable basis so as to avoid debt service – which currently absorbs over 40 percent of tax revenue – from overwhelming the budget”.
Apprehension over the public debt stock – which stood at GH¢402.4billion at the end of July this year – appears to be reaching a crescendo, as the World Bank is projecting the country to end the year with a debt-to-GDP ratio of 104.6 percent; 1.5x the prudential 70 percent threshold for a lower-middle-income country, as energy and financial sector debts have come into play.
This has heightened investor unease as threats of significant debt restructuring continue to loom, with the BoG Governor Dr. Ernest Addison recently offering tacit support for conversation around the debt-cap.
Despite welcoming the conversation, Dean of the University of Cape Coast (UCC) Business School, Professor John Gatsi, said the failure of fiscal authorities to adhere to generally agreed-upon limits gives cause for worry.
“It is a welcome idea, and we can have conversations about what format will best apply to us considering our circumstances as we attempt to ensure that we are fiscally disciplined. But we already have a form of debt-ceiling in place, and that is what is guided by the debt sustainability ratio of 70 percent of GDP for a country such as ours; and that in itself is a ceiling that should guide the country in its borrowing,” he said.
The economist expressed reservations over parliament’s willingness to ensure enforcement even if the law is expedited.
“The effectiveness will depend on parliament – because there have been times when parliament, having the powers as an oversight body, could have dealt with those responsible for fiscal management of the country; but we have not seen any action from parliament,” he added, citing the Legislature’s failure to act after the fiscal responsibility threshold was breached one year after it received legal backing.