For every cedi collected in taxes, 42p goes to pay debt

• interest payments to surpass wages and salaries

Ghana’s debt situation is such that out of every cedi collected in taxes by the Ghana Revenue Authority (GRA), 42 pesewas – almost half – is used to pay interest on the country’s debt; taking resources away from critical sectors, analysis by the Institute for Fiscal Studies (IFS), a policy think-tank, has shown.

In a caution to government to quickly arrest the situation which has gone from bad to worse since 2008, the policy think-tank added that interest costs are now higher than domestic-financed capital expenditure – and are threatening to equal or even overtake wages and salaries.

“In fact, 2017 was the fifth successive year that total interest payment was larger than total domestic-financed capital expenditure; suggesting that interest payments will probably be financed through additions to public debt or at the expense of other key government expenditures,” the Executive Director of the think-tank, Prof. Newman Kusi, said at a roundtable discussion on the country’s debt burden.

Out of all government revenues, including taxation, interest payment on public debt accounted for 8.5 percent of total government expenditure in 2008, rising to 11.8 percent in 2012 and then to 21.1 percent in 2016.

In 2017, it ballooned to 25.8 percent of government expenditure, becoming a major factor behind the country’s fiscal deterioration…besides wages and salaries.

But as a percentage of total tax revenue, interest payment on public debt stood at 15.8 percent in 2008 but increased thereafter to an average of 20.2 percent between 2009 and 2012, and 36.6 percent during the 2013-2016 period.

In 2017, interest payment on public debt was equal to 41.8 percent of total tax revenue.

“This means that while in 2008 about 16 pesewas of each GH¢1 tax collected by government was used to pay interest on its debt, by 2017 the figure had increased to 42 pesewas due to the astronomical increase in public debt stock over the period.

“This suggests that resources have been taken away from several critical sectors of the economy, with serious negative implications for growth and poverty reduction,” he added.

Speaking at a roundtable discussion organised by the IFS on the theme ‘Ghana’s Growing Public Debt – Implications for the Economy’, Professor Kusi warned that the country has fallen into a ‘debt trap’ as real interest rates continue to surpass GDP growth rates.

“Debt service now absorbs a large part of domestic revenue, leaving the country vulnerable to shocks. This has forced the country to continue committing more of its tax revenue to service debts.

“Ghana’s rising public debt is already placing a significant burden on the economy and society, and the country is at risk of falling back into an extended debt trap – with economic stagnation and possible increases in poverty rates, and failure to implement the Sustainable Development Goals,” he warned.

The IFS recommended that government adopts a comprehensive debt management strategy that puts caps on the levels of gross concessional and non-concessional borrowing.

“Ghana’s rising interest cost cannot be contained through debt re-profiling as the current debt management strategy seems to suggest. Government therefore needs to formulate an annual borrowing plan, improve Treasury management and forecasting, enhance debt reporting, and strengthen operational risk management,” he said.

There is also need, he added, for a strong domestic revenue mobilisation effort; including a broadening of the revenue base to include the informal sector, reviewing the extractive industry fiscal regime, removing exemptions and plugging leakages, and strengthening the machinery for tax collection and administration.

“The collection, use and accountability of internally generated funds by public institutions and agencies should be given serious attention. The assessment, collection, use and accounting for oil revenues must also be subjected to regular public accountability.”

The decision on how to use borrowed funds is important to ensuring debt sustainability, the IFS said.

Funds raised by issuing debt should be invested in projects that have a high private or social return, because debt accumulation is unlikely to be sustainable if loans are used to finance public or private consumption with no effect on long-term growth, it added.

Ghana’s Debt Profile

Ghana’s debt stock has increased astronomically over the last decade, from a total of GH¢4.92billion in 2000 to GH¢8billion in 2003, representing an increase of 62.6 percent.

By end-2006, the debt stock had dropped to GH¢4.90 billion or more than half, following reliefs the country received from the Highly Indebted Poor Country (HIPC) initiative and multi-lateral debt relief initiative (MDRI) during the period.

It however began to rise again thereafter, reaching GH¢9.7billion in 2008 – reflecting the large fiscal deficit recorded in the year, and impact of cedi-depreciation on the external debt.

Total public debt continued to rise since, reaching GH¢35.1billion at end-2012; and by end-2016 it had jumped to GH¢122.6billion, and to GH¢138.9billion by September 2017.

The total public debt came to about GH¢146.2billion at end-November 2017, with the ESLA Plc. GH¢4.7billion bond issued in late October 2017 and the sale of GH¢5.3billion of long-term bonds at the end of November 2017 – of which nearly half consisted of fresh borrowing and the other half Treasury bills that were restructured into long-term bonds, are added.

Total public debt thus increased by GH¢133.9billion between 2006 and September 2017.

Table 1. Ghana: Public debt incurred between 2000 and 2017