Accra, Ghana//-At the time that a crack team of IMF officials in Ghana at the request of the Akufo-Addo-led government for assessment leading to another bailout to enable the country access the international financial market, policy credibility and balance of payment support, an Accra-based Centre for Social Justice (CSJ) has raised red flags over the country’s debt accumulation.
In its latest report the Centre warned that unless measures are implemented soon to curtail the pace of debt accumulation by the Ghanaian government and focus on the efficient management of the economy in its entirety, it may be challenging to fully restore the country’s access to international debt markets.
The comprehensive report titled; ‘a 20-year review of Ghana’s Debt profile titled ‘A 20-year Review of Ghana’s Debt: Trends, Drivers, and Implications’ lamented that the acceleration of debt accumulation has coincided with a persistent fiscal deficit, including the deterioration of the current account, currency depreciation, and terms of trade shocks.
It also added that the debt acceleration coincided with a saving-investment gap; a generally low global interest rate environment, leading to the search for higher yields by foreign investors; additional cost from the financial sector bailouts/clean-up; and the economic fallout from the COVID-19 pandemic.
The Centre’s Finance & Economy Pillar which conducted the research uses data from the World Bank, IMF, Ghana Ministry of Finance, and Bank of Ghana.
The overall cost of debt service has been increasing due to the increase in non-concessional borrowing and the high cost of private short-term loans, including domestic and Eurobonds.
The implications of rising public debt, above the 60 percent to GDP level, should be a source of concern to managers of the country’s public debt because high debt servicing costs drain limited resources and reduce allocations to critical social services, including education, health, and support to the most vulnerable in society, according to the Executive Director of Centre for Social Justice, Dr Sodzi Sodzi-Tettey.
Equally concerning is how revenue mobilization efforts have significantly lagged the pace of debt accumulation in recent years.
Since 2015, the country’s debt to GDP ratio has significantly increased while the revenue to GDP ratio has steadily declined. The country does not necessarily need to halt borrowing.
However, the current debt situation requires all stakeholders, including the government, our lenders, development partners, and civil societies, to rally together to devise the necessary measures needed for fiscal consolidation before the situation deteriorates into a full-blown sovereign debt crisis.
How serious is the country’s debt situation?
According to figures from the Ministry of Finance, as of December 2021, Ghana’s total public debt has risen sharply to $58.6 billion (GHc351.8 billion), representing 76.6 percent of GDP. When compared this with the $50.8 billion (GHc291.6 billion, representing 76.1 percent of GDP) recorded a year earlier.
By the end of the first quarter of 2022, Ghana’s total public debt stock is $55.1 billion (GHc391.9 billion), representing 78 percent of GDP, according to the Bank of Ghana.
The alarming increase in the public debt, the report noted, is a source of concern to investors, development partners, and the Ghanaian population.
Currently, Ghana ranks among the top 10 countries in Sub-Saharan Africa (SSA) with the highest debt to GDP ratios and the debt to GDP is projected to reach 85 percent by 2023.
Recommendations
To resolve the country’s fiscal challenges associated with the rapid increase in debt accumulation, confidence in Ghana must be restored in the domestic and international investment and debt markets.
For short-term Strategies, the report called for immediate fiscal consolidation efforts aimed at enhancing revenue mobilization and reducing expenditures.
“In its fiscal consolidation efforts, the government should consider reducing the size of the State or at the very least capping expenditures and leverage newly implemented institutional measures, such as the national identification systems, to boost revenue mobilization”.
It also recommended to the government to engage creditors to initiate a process for debt re-profiling and restructuring.
Initiating this process may require the involvement of major development partners, including the IMF, who often requires any party seeking debt relief to demonstrate a thorough understanding of their existing debt and terms and be willing to have a broader debt restructuring conversation with all current major creditors.
The extent of engagement with the IMF, in particular, could lead to further expenditure rationalisation, which could potentially reduce aggregate demand and temporarily slow economic growth, it stressed.
However, with limited and costly alternatives, accepting and embarking on an IMF adjustment program may be the main feasible route to avert a sovereign debt crisis.
The report which examined Ghana’s public debt from 2000 to March 2022 added its voice on the call of the government to immediately review all tax waivers and tax exemptions to refocus only on investments whose strategic economic value exceeds tax waivers granted.
Tax from employees, service providers, and clients should be demonstrably higher than tax waivers or exemptions granted to each entity.
Touching on medium- to long-term strategies, the report suggested to the managers of the Ghanaian economy to increase cooperation with development partners to enhance responsibility, transparency, and mutual accountability in lending practices, to minimize inefficiencies in borrowed funds.
Official development assistance could also be targeted at strengthening the country’s tax system to make it more efficient and equitable.
Reform and strengthen public debt governance with an emphasis on increasing transparency and accountability in borrowing and public debt utilization decisions, it noted.
“Additionally, setting up and enforcing effective rules on parastatal sector management to reign in borrowing by state-owned enterprises. Expand on inclusive policy building to promote an equitable agenda that transcends short-term changes in governance. For example, access to quality education is a fundamental pillar of social justice”.
The report did not mince words when it called for an inclusive policy to make quality education accessible to all, regardless of economic and social circumstances.
Hence, it said free education should be a must for all segments of the Ghanaian society including those who cannot afford to pay fees to access education at all levels, not just Free Senior High School.
The report however noted that the prevailing Free Senior High School being implemented by the current government requires urgent review and conversion into a targeted scholarship scheme run by the Scholarship Secretariat.
“Parents who have the means should pay for the education of their wards at all levels. This will allow for significant savings in both direct costs of the Free Senior High School and the administrative costs of a separate secretariat, as is currently the case.
The savings made should be applied to improving the quality of education through such means as better school infrastructure across all levels. This way, additional borrowing to finance education infrastructure may not be needed”.
Ghana currently faces significant developmental challenges, and the current financing framework, over-reliance on high-cost debt, mostly non-concessional, is unsustainable.
As a result, there is an urgent need for the country to adopt an effective financing framework to meet the current challenges. There are no easy solutions for moving the country towards a sustainable debt path.
However, a new financing framework that ensures debt sustainability would put the country on the path of steady progress towards attaining the Sustainable Development Goals and boost resilience even when future economic challenges emerge.
African Eye Report
