Figures released by the Bank of Ghana (BoG) yesterday have revealed that the government has, within three months, added GH¢12.1 billion to the country’s debt stock.
This brings our total debt (both domestic and foreign) to GH¢88.2 billion as at the end of March 2015, up from GH¢76.1 billion recorded in December last year.
“The total public sector debt stock stood at GH¢88.2 billion at the end of March 2015, representing 65.3 percent of GDP. Of the total public debt, domestic debt constituted 41.4 per cent, and external debt 58.6 per cent,” the Governor and Chairman of the Monetary Policy Committee (MPC), Dr. Henry Wampah, confirmed at a press briefing in Accra.
This means that Ghana loses 65.3% of its GDP to the ever-growing public debt. GDP is defined as the total market value of all final goods and services produced in a country in a given period, usually a year or quarterly.
Every Ghanaian owes over GH¢3,666
Ghana, with an estimated population of 24 million people, which when divided by the current public debt of GH¢88.2 billion, every Ghanaian would owe over GH¢3,666 to the country’s creditors, both internally and externally, as of March 2015.
Public debt accrues over time, when the government spends more money than it collects in taxation, and as a government engages in more deficit spending, the amount of public debt increases. That is the exact sad story of Ghana, according to economists.
But, the Minister of Finance, Seth Terkper, in the 2015 budget, admits there is an increasing debt service to revenue ratio that will require swift fiscal adjustment in order to put the economy on a path of sustainable public debt in the medium-term. Past MPC reports in possession of The Chronicle have shown that in August 2014, the country’s public debt stock stood at GH¢66 billion, which was ballooned to GH¢76.1 billion as at the end of December 2014.
Widening Debt-Trap
A renowned economist and lecturer at the Ghana Institute of Management and Public Administration (GIMPA), Dr. Raziel Obeng-Okon, maintains: “As it stands now, the government cannot immediately get out of the debt-trap, because maturing obligations cannot be paid out of its relatively low revenue base.
“Restructuring of the debt from short to long term may bring some respite, but can only be sustainable if the short term relief is combined with strong fiscal consolidation.
“While swapping old debts with new ones, it is important that any surplus of the new debt, over and above the old debt, goes into projects that can pay for themselves.
“Otherwise, the restructuring would only lead to growing the debt without a corresponding growth in productivity or GDP, leading to a worsening situation of the debt-to-GDP ratio,” he told the newspaper in an interview.
An analysis of the country’s revenue base as a percentage of GDP, and the interest payment as a percentage of revenue, shows that the current level of public debt-to-GDP ratio may not be sustainable.
Given the country’s relatively low levels of revenues, vis-à-vis high and rising expenditure, the high debt-to-GDP ratio may make it more difficult for Ghana, in the medium term, to pay its debts.
This high debt, with its attendant high interest, contributed in creating a panic in the domestic and international markets, and credit rating agencies had to reduce Ghana’s rating further downwards.
Low Revenue to GDP Ratio
Dr. Obeng-Okon, who lectures Public Accounting at GIMPA, observed: “The total tax revenue to GDP ratio for most developed countries is about 40%, but the total revenue for Ghana, from January to September 2014, was about GH¢17.76 billion, representing only 15.4% of its GDP, which is too low, compared with the levels attained by the developed economies.
“Clearly, the revenue base for Ghana is too small to warrant the 67.1% debt-to-GDP ratio. The current debt level may be sustainable, only if Ghana can double its revenue base at the current GDP level to achieve a revenue-to-GDP ratio of not less than 25.0%, but this cannot be achieved in the short term.
“Government needs to pull the brakes on the expenditure side by prioritising its projects, and making sure loanable funds can be matched by revenue generating activities. I think the Finance Minister, Mr. Seth Terkper, has started looking at this option, but he should have done this much earlier. As it stands now, it is going to be difficult for Ghana to get out of the debt trap.”
Reviewing the Ghanaian economy in the first quarter of the year, Dr. Wampah warned: “Gold prices could come under some pressure in the first half of 2015, as financial markets continue to anticipate the Federal Reserve rate hikes.
“Prices are projected to remain within the range of US$1,180 and US$1,250 per ounce. Brent crude oil prices are expected to average $59 per barrel in 2015, with prices rising from an average of $62 in the second quarter to $67 per barrel in the fourth quarter. Cocoa prices are projected to peak in 2015, as supply weaknesses push up prices. Cocoa prices are projected to average US $3,052 per tonne in the second quarter.”
Fiscal consolidation on track
The BoG’s preliminary fiscal data for the first quarter indicated that the fiscal consolidation efforts are on track. Revenue and grants were above target on the back of strong growth in domestic revenue, according to Dr. Wampah. Expenditures were below target, as the major items, including the wage bill, were contained within target.
He was quick to add: “These resulted in a cash fiscal deficit equivalent to 0.6 percent of GDP, against a target of 1.9 percent. The deficit was financed mainly from external sources, totaling GH¢1 billion, with a domestic net repayment of GH¢278.2 million.”
Energy crisis weighs on growth
The current power crisis, arising from erratic supply of imported gas from Nigeria through the West Africa Gas Pipeline (WAGP) to power thermal plants in the Tema enclave and Aboadze in the Western Region, and the shortfall in electricity supply, occasioned by the drastic reduction of water in the Akosombo Dam reservoir, is having a toll on the country’s growth.
The MPC observed that challenges in the energy sector, fiscal consolidation, depreciation of the currency, as well as the current high cost of doing business, could weigh down on economic activity.
Also, business sentiments have softened, while consumer confidence, though up, remained subdued. External sector vulnerabilities also pose considerable risk to both inflation and growth. In particular, the fragile global financial conditions and continued commodity price volatility could adversely impact on reserve accumulation. Also, the anticipated increase in US interest rates could lead to capital flow reversals.
It was noted that credit to the private sector was steady, while the BoG’s Composite Index of Economic Activity (CIEA) indicated a moderate pickup in economic activity.
Growth prospects in the medium term are, therefore, positive, especially, with the coming on stream of the Tweneboa-Enyenra-Ntomme (TEN) project, as well as expected improvement in the macroeconomic environment.
The BoG also observed that fiscal performance in the first quarter has been encouraging, with the deficit, as well as Central Bank financing, well within targets. Although the emerging consolidation constitutes a downside risk to growth, the subdued demand pressures will help to dampen inflation pressures.
Dr. Wampah noted: “Sustaining the first quarter performance over the medium term is critical, and together with the tight monetary policy stance, will facilitate the achievement of macroeconomic stability.”
Balance of Payment deficit
For the first quarter of 2015, he revealed that the Balance of Payment (BOP) registered a deficit of US$849.4 million, compared with a deficit of US$920.7 million for the same period in 2014.
The deficit, Dr. Wampah explained, was mainly due to a sharp decline in the capital and financial account, whereas the current account recorded some improvement.
“The current account deficit narrowed from US$1.1 billion in the first quarter of 2014, to US$549.3 million in the same period of 2015.
“This was driven by an improvement in the Services, Income and Transfer account.
“However, the trade deficit worsened from US$215.1 million to US$446.2 million.
The Capital & Financial account registered a surplus of US$54.8 million, compared with US$499.5 million in 2014.”
The country’s gross foreign assets, at the end of April 2015, stood at US$4.8 billion, representing 3.2 months of imports cover, compared to US$5.2 billion for 2014, which was 3.2 months imports cover, according to the Governor.
African Eye News.com
