Ghana’s anticipated $1.5 billion Eurobond to be raised by the government, is set to add to the country’s debt stock, which will expose the economy to further grave risks and a continuing high interest burden.
According to economists, the inflows from the Eurobond and cocoa credit facility will certainly bolster the central bank’s reserves and support the stability of the currency in the short term.
“However, as we saw last year, such inflows are not a panacea to the cedi’s depreciation and the currency remains vulnerable to fall, so long as the government has not sorted out its finances.”
Commenting on the recent revision of the growth target and Eurobond issue, a renowned economist and lecturer at the Ghana Institute of Management and Public Administration (GIMPA), Dr. Raziel Obeng-Okon explained that the Eurobond would certainly add to the country’s debt stock.
It is only the portion (about US$500m) that will be used to buy-back the 2017 bond that will not add to the debt, but the rest of it (US$1bn) will, he added.
Stability versus Growth
According to him, the current economic challenges make it imperative to put more weight on stability, with the hope that it gives birth to growth in the medium term.
“The medium to long term prospects remain bright only if we manage the short term imbalances well by stabilizing the economy in 2015.
In the medium term, lower inflation and lower interest rates, combined with a more stable exchange rate, would be needed to help support private sector activity for growth. Achieving stability rather than growth is what is needed for Ghana’s economy right now. The debt level is still very worrying and must be contained to ensure stability”.
In Dr Obeng-Okon’s view, stability was expected to give birth to growth, especially when the country’s monetary policy tools have not generated the desired stability that is required to propel the economy. “Government needs to continue with its fiscal consolidation but needs to take a second look at its monetary policy in the area of interest rates and inflation”.
The Public Debt
He insisted that any additional debt would obviously add to the public debt. The country’s total public debt as at May 2015 stood at GH¢90 billion, representing 67.53% of GDP.
The rising debt stock, Dr. Obeng-Okon observed is a big source of risk for the economy and is increasingly leading the country to a point where it will no longer be able to shoulder the interest burden.
Already, debt service has crowded out critical expenditure and it could worsen if the appetite for borrowing is not curbed. If the government continues on this path, the economy will crash under the debt, because the country will have to choose between servicing its debts or building the schools, roads and hospitals it badly needs.
Ghana’s rapid debt build-up shows no sign of abating, with the public debt stock reaching 90 billion cedis at the end of May 2015, which is about 160% more than its level just two and a half years ago and a huge threat to the country’s prospects.
Managers of the economy will have to engage themselves feverishly in efforts to achieve stability by the end of 2015 since growth is unlikely to be strong due to the numerous challenges that have bedeviled the Ghanaian economy, he added.
“In 2015, growth is expected to be very modest due to the instability in the energy sector, depreciation of the currency, high inflation, high cost of doing business in Ghana and the loss of business confidence.
External sector vulnerabilities, relatively high interest rates, and the decline in credit growth to the private sector may stall growth of the economy”.
Dr. Obeng-Okon suggested that Ghana’s development agenda must ensure that there is a proper equilibrium between the fiscal policy (goods market) and the monetary policy (money market) because the two policies must be aligned for stability and growth.
Surprisingly, 2 billion dollars worth of Eurobonds which have been issued in the last two years, with no evidence on the ground of projects funded by the bonds that will catalyse economic growth.
Last year’s Eurobond, for instance, was mostly used to pay central bank debt, as it arrived at a time when the government was overly indebted to the Bank of Ghana.
The lowering of the projected growth rate to 3.5% means lower prospects for job-creation and income growth. It is the clearest sign that all is not well with the economy.
Dr. John Gatsi’s position
A renowned Chartered Economist at the University of Cape Coast (UCC), Dr John Gatsi, on his part explained to African Eye News in a telephone interview that the upcoming Eurobond of 1.5 billon dollars would help the government to fund critical projects in the area of infrastructure and refinance existing loans.
However, he also admitted that it would increase the debt burden of the country but stressed that: “It has the possibility of contributing to exchange rates stability which is needed to further help in the recovery process of the economy.
I am saying that the revision of the growth target is to bring the target in line with the reality of the economic environment including the harsh energy crisis and shortfall in expected revenue”.
On the recent revision of the country growth target by the government, Dr. Gatsi noted that the main project of government had been prioritised so that execution was not hugely affected.
“So, it is not the revision of the growth target itself that will negatively affect employment. Proper prioritization and efficient expenditure may cushion the effect bearing in mind even in time of good growth prospects if the growth is not distributive enough it cannot impact positively on employment”.
On Tuesday, this week the Minister of Finance, Seth Terkper, revised the country’s overall real GDP growth from 3.9 percent to 3.5 percent; non-oil real GDP growth from 2.7 percent to 2.3 percent; and end-year inflation from 11.5 percent to 13.7 percent, citing developments in both the domestic and global economic environment.
While overall budget deficit target was revised from 6.5 percent of GDP to 7.3 percent; and
Gross International Reserves was projected to remain at not less than three months of import cover of goods and services in the country.
Mr. Terkper stated: “Mr. Speaker, as a result of the revisions made to the macroeconomic framework and the fiscal performance for the first five months of the year, the 2015 revenue and expenditure estimates have been revised”.
African Eye News.com
