By Enoch AKUFFU-DJOBI (PhD)
In recent years, Ghana has found itself in a precarious economic situation, with rising inflation and low Treasury Bill (T-bill) rates highlighting deeper structural vulnerabilities within the nation’s economy.
As per source from Bank of Ghana, the current interest rate for 91-day bill is 15.25% while that of inflation is hovering around 23.1%.
From analytical point of view, while the government may view low T-bill rates as a short-term solution to financing its debt, the consequences are far-reaching.
These low rates, combined with high inflation, signal potential instability, and economic fragility, especially in a country already grappling with mounting debt levels.
This article examines the economic vulnerabilities that arise from low T-bill rates in the context of Ghana’s historical economic trajectory and offers a critical perspective on the risks that the country faces.
The Economic Context: Inflation and Rising Debt
Ghana’s economy has been under pressure in recent years. Inflation, which has averaged around 10-15% in the past decade, spiked significantly in 2022 and 2023, reaching figures upwards of 40%.
At the same time, government debt has surged, with the public debt-to-GDP ratio rising to alarming levels. According to the Bank of Ghana, the country’s public debt reached about 80% of GDP in 2023. This burgeoning debt burden, combined with inflationary pressures, has created a perfect storm, one that low T-bill rates only exacerbate.
Historically, T-bills have been a key instrument for the government to raise short-term funds. However, when inflation outpaces the interest rates offered on these bills, investors face negative real returns, meaning the purchasing power of their investments is eroded.
In Ghana’s case, the government has had to offer lower interest rates on T-bills, partly due to the desire to manage its debt repayments and reduce borrowing costs. But this is a double-edged sword.
Low T-Bill Rates: The Short-Term Fix and Long-Term Problem
On paper, low T-bill rates might seem advantageous for the government, especially when the country faces a debt crisis. Lower borrowing costs reduce the immediate fiscal burden and give the government room to maneuver.
However, the low rates indicate a lack of confidence in the economy, signaling a potentially dangerous situation. If T-bills are yielding rates below the inflation rate, this suggests that investors do not view the country as a safe place to park their money for the long term.
In Ghana’s case, inflation has consistently outpaced T-bill rates over the past few years. For example, in 2022, while inflation hit around 33%, the interest rate on 91-day Treasury Bills hovered around 19%.
This gap between inflation and interest rates signals a lack of investor confidence. Investors, particularly in emerging markets like Ghana, demand a risk premium for their investments. If this premium is not provided through sufficient returns on government debt instruments, capital may flee the economy, worsening the currency depreciation and increasing inflationary pressures.
Historical Evidence: The Dangers of Low T-Bill Rates
The historical context of Ghana’s economic performance offers valuable insight into the dangers of this approach. In the early 2000s, Ghana had relatively low levels of public debt, and the government could comfortably service its obligations.
However, following the global financial crisis of 2007-2008 and subsequent years of borrowing to finance infrastructure projects, the country’s debt levels began to rise. By the mid-2010s, Ghana faced increasing fiscal deficits, and in 2015, the International Monetary Fund (IMF) stepped in to offer a bailout program.
Despite IMF-backed programs that aimed to restore fiscal discipline, the debt continued to increase, exacerbated by mismanagement and continued reliance on borrowing.
By 2020, Ghana’s debt-to-GDP ratio stood at approximately 63%. However, the impact of the COVID-19 pandemic and global supply chain disruptions further pushed debt levels upward. In this climate, the government has increasingly resorted to issuing Treasury Bills as a means to meet short-term financing needs.
But the consistent trend of low T-bill rates in recent years is not a new phenomenon. The late 2010s and early 2020s witnessed a stagnation in interest rates on T-bills, despite rising inflation.
This was reflective of the country’s declining credit ratings, as agencies like Moody’s and Fitch expressed concerns over the government’s ability to manage its debt. T-bill rates remained low as the government struggled to balance the need for fiscal consolidation with the necessity of raising funds.
Inflation: A Silent Erosion of Wealth
One of the most damaging consequences of low T-bill rates during high inflation is the erosion of wealth. For individuals and institutional investors alike, purchasing power diminishes rapidly.
For instance, if an investor purchases a 91-day Treasury Bill yielding 15%, but inflation is 23%, the real return is negative, and their wealth is effectively shrinking. This problem becomes more acute in a developing economy like Ghana’s, where inflation is often volatile and can be exacerbated by external shocks, such as fluctuations in commodity prices or disruptions in global supply chains.
Furthermore, low T-bill rates discourage domestic savings and investment. In Ghana, where savings rates are relatively low compared to more developed economies, the low yields on government securities make it harder for households to accumulate wealth.
Consequently, capital is less likely to be reinvested into productive sectors of the economy, such as manufacturing or technology, which are crucial for sustainable long-term growth.
The Risk of Debt Default and Currency Depreciation
The situation becomes even more concerning when considering Ghana’s currency, the cedi. Low T-bill rates signal diminished investor confidence, which in turn can exacerbate the currency’s depreciation. Over the past decade, the cedi has steadily depreciated against the dollar, reaching new lows.
As the value of the cedi declines, the government’s debt burden rises in dollar terms, making it even harder to service debt. A further depreciation could lead to a vicious cycle of rising inflation, currency instability, and increased borrowing costs.
In this environment, the risk of a debt default or restructuring becomes increasingly real. As T-bill yields stay low, and inflation continues to erode the value of these instruments, the government faces a critical challenge in convincing both domestic and foreign investors of its ability to meet its obligations.
A default or debt restructuring could have severe implications for Ghana’s creditworthiness, further damaging investor confidence and worsening the cost of borrowing.
Conclusion: A Call for Sustainable Fiscal Management
The situation in Ghana requires urgent attention to the broader fiscal and economic management practices. Low T-bill rates during high inflation signal economic vulnerability, as they highlight a lack of investor confidence and a potentially unsustainable fiscal trajectory.
To address these issues, the government must focus on tackling inflation through better fiscal discipline, economic diversification, and structural reforms that reduce dependency on debt.
It is essential that the government does not rely solely on low-interest borrowing to meet its financial obligations, as this only prolongs the pain.
Instead, sustainable fiscal policies, investment in domestic industries, and efforts to stabilize the currency must become top priorities. Failure to do so will only exacerbate Ghana’s vulnerabilities and prevent it from achieving long-term, sustainable economic growth.
Ghana must act decisively to manage its debt burden and inflation, or risk further economic instability that could derail its growth ambitions for years to come.
Enoch is a Chartered Accountant / Certified Banker with a deep passion for accounting, banking, and governance. His expertise spans both education and practice reflecting a commitment to research and knowledge sharing. He can be reached via [email protected]). Contact: +233244201383.
