By Samuel Lartey(Prof)
President John Mahama’s announcement to reinstate the Sinking Fund to manage domestic debts of approximately GH₵15 billion and service external debts signals a pivotal moment for Ghana’s fiscal policy.
The decision shared during an exclusive Bloomberg interview, aims to strategically address long-term debt repayments and provide relief for the government’s fiscal obligations.
Understanding the Sinking Fund and Its Impact
The Sinking Fund, originally introduced in 2014 under Mahama’s administration, was designed to accumulate reserves from excess oil revenue to repay maturing debts.
By 2016, the fund had facilitated the buyback of a $750 million Eurobond, saving the country millions in interest payments. However, its suspension in subsequent years contributed to a rise in the debt-to-GDP ratio, which reached 88.1% by 2023.
A New Approach for the Next Four Years and Beyond
To make a significant impact on the Ghanaian economy, the government should adopt a multi-sectoral strategy involving government initiatives, corporations, and private businesses:
Government Initiatives:
Revenue Diversification:
Broaden revenue streams through improved tax collection, digitalization, and reduction of tax loopholes.
Fiscal Discipline:
Limit excessive borrowing and ensure that loans are directed toward productive sectors.
Public-Private Partnerships (PPPs):
Leverage private investments to fund infrastructure projects, reducing the debt burden on the public purse.
Large, Medium, and Small Corporations:
Investment in Local Supply Chains:
Encourage corporations to source materials and services locally to promote domestic industries.
Sustainability Bonds:
Issue corporate bonds targeted at supporting national development projects.
Debt Management Programs:
Collaborate with financial institutions to restructure corporate debts and align with national debt reduction goals.
Private Business Initiatives:
Entrepreneurial Growth:
Provide tax incentives for startups and SMEs that contribute to job creation.
Financial Literacy Programs: E
quip business owners with knowledge on debt management and investment.
Alternative Financing Models:
Promote crowdfunding and venture capital as means to reduce dependency on bank loans.
Impact on the Larger Ghanaian Citizenry
The reactivation of the Sinking Fund, if managed effectively, will yield several benefits for Ghanaians:
Lower Inflation Rates:
Improved fiscal management could stabilize the cedi and reduce inflation, which peaked at 45% in March 2023.
Job Creation:
Enhanced private sector growth, especially in the SME sector, could address the unemployment rate, which stood at 14.7% in 2023.
Social Programs:
Savings from reduced debt service costs can be redirected toward education, healthcare, and affordable housing.
Financial Projections and Long-Term Gains
According to the Ministry of Finance, reactivating the Sinking Fund with a dedicated annual allocation of $500 million from oil revenues could retire up to $5 billion in debts over the next four years. Additionally, leveraging PPPs for infrastructure projects could unlock $3 billion in private investments.
Historical and Contemporary Perspectives
Ghana’s experience with the Sinking Fund in 2014 demonstrated the effectiveness of proactive debt management. Internationally, countries like Norway have successfully used sovereign wealth funds to manage national resources and debts, providing a model for Ghana’s long-term financial sustainability.
Conclusion
The reinstatement of the Sinking Fund represents a strategic opportunity for the new government to address Ghana’s debt crisis comprehensively. However, its success will depend on fiscal discipline, inclusive private sector participation, and citizen-centered policies. With coordinated efforts across sectors, Ghana can achieve sustainable economic growth and fiscal resilience in the next four years and beyond.
