GHANA’S ECONOMY NOSE DIVES

seth_terkperThe bleak economic story of Ghana, since 2013, is set to continue, as gross domestic product (GDP) growth is at its lowest in 14 years, and the dollar value of the economy has shrunk considerably.

As if this is not enough, the International Monetary Fund (IMF) is predicting that economic growth would fall to as low as 3.5% this year.

Also, the Ghana Statistical Service’s (GSS) first quarter GDP report for 2015 indicated that the Ghanaian economy dropped from $48.6 billion in 2013 to $38.3 billion in 2014 at market exchange rates.

The drop in the size of the economy in 2014 (over $10 billion), in dollar terms, was due to the exchange rate depreciation, which saw the cedi decline in value by more than 30% against the dollar last year.

Declining growth bad for economy

This development, according to economists, would have repercussions on the import-dominated economy, lamenting that declining economic growth is bad for incomes and job-creation.

It is also bad for the country, which seeks foreign direct investments (FDIs) for development, as international investors usually look at the dollar value of the size of the economy among other factors, before making decisions on where to invest their money.

Furthermore, the deceleration in growth, as described by the economists and analysts, is more worrying, in the sense that even when the country recorded a high GDP growth, there was jobless growth.

Now that the country is on a low growth trajectory, the economy will continue on the jobless growth trend, while layoffs are expected in the coming years in the country’s public sector, occasioned by the new $918 million IMF bailout programme.

In the international commodity markets, crude oil is projected to average US$52.8 per barrel. Gold prices are projected to average $1,276 in 2015, while cocoa is projected at about US$2,995 per tonne in 2015.

These developments, according to the Bank of Ghana (BoG), would have implications on the domestic economy.

As a result of the fall in commodity prices, the terms of trade are declining widely in the country, while still high inflation and fiscal consolidation will weigh on the country’s growth.

Foreign direct investment inflows were subdued in 2014, reflecting slower growth in Ghana and other emerging markets, and declining commodity prices.

Ghana continues to tap into international bond markets to finance infrastructure projects and refinance debt.

The country returned to the market in July 2014 to issue its third Eurobond worth up to US$1 billion to refinance debt and fund infrastructure projects in the country.

In addition to this, in September 2014, it went to the market again to raise $1.7 billion in Ghana Cocoa Board (COCOBOD) syndicated loans for the purchase of cocoa beans in the 2014/2015 cocoa season.

High interest payments

The government, as stated in its 2015 budget, is to spend a whopping GH¢9.5 billion (about $2.5bn) this year as interest payments on the huge loans it has contracted. Out of the figure, GH¢8 billion would be used to pay interest on domestic loans, with the remaining GH¢1.5 billion earmarked for external creditors.

In the 2014 fiscal year, the government spent GH¢6.6 billion as interest payments on loans. The huge amount is more than three times the total budget for six ministries put together, as captured in the 2015 budget.

The Ministries are Finance (GH¢705 million), Ministry of Local Government and Rural Development (GH¢6.1 million), Ministry of Food and Agric (GH¢411 million), Ministry of Fisheries and Aquaculture Development (GH¢276 million), Ministry of Trade and Industry (GH¢183 million), and Ministry of Tourism, Culture and Creative Arts (GH¢33 million) – all these amount to GH¢1.6 billion.

According to the World Bank, interest payments are actual amounts of interest paid by the borrower in currency, goods, or services in the year specified. The interest payment is the price you pay for obtaining loans from domestic and foreign sources, which is usually calculated as a fraction of the amount borrowed.

A renowned economist, Dr. Mahamudu Bawumia, lamented: “The increase in Ghana’s debt has placed a major burden on public finances with regard to interest payments on the debt. Interest payments on domestic and external debt declined from 7.5% of GDP in 2000 to 2.3 percent by the end of 2008.

Since then, interest payment has increased to 5.1% of GDP in 2013, and would reach 6.5% of GDP by the end of 2014. The increase in interest payments by 2.8% of GDP, between 2008 and 2013, has taken away critical fiscal space that was available to the government, and that was created as a matter of deliberate strategy and policy choices.”

Another renowned economist and lecturer at the Ghana Institute of Management and Public Administration (GIMPA), Dr. Raziel Obeng-Okon, stated: “The 2015 budget shows that out of the budgeted GH¢30.86 billion total domestic revenue, as much as GH¢9.58 billion will go to settle interest on loans, representing about 31% of total domestic revenue.”

He told The Chronicle: “The budget for interest payment of GH¢9.58 billion is more than what Ghana could possibly raise from total external loans and grants of GH¢6.75 billion and GH¢1.55 billion respectively.

All the loans and grants anticipated (GH¢8.30 billion) for 2015 will not be enough to service the total interest payments. This is a signal that Ghana is borrowing to refinance interest repayments, and this is not sustainable in the medium to long term.”

The Finance Minister, 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.

Why the government seems to be cash-strapped

Government expenditure on public sector wages, interest on debts, and transfers to statutory funds consumes virtually all domestic revenue collected, leaving very little to transfer to Ministries, Departments and Agencies (MDAs) and Metropolitan, Municipal, and District Assemblies (MMDAs) to meet their goods, services and capital expenditures.

The government thus has to resort to borrowing, or it uses the strategy of not transferring the required payments to the statutory funds, or the required allocations to the MDAs in a bid to reduce the pressure on its finances.

This is what is responsible for the cash crunch in MDAs, some of which owe electricity and water bills, as well as other debts to contractors and suppliers.

Despite all the talk by the government about reducing the pressure of wages, interest and statutory transfers on its finances, it has achieved little so far, and the high expenditure on these items is still continuing.

In addition, the corruption in the system is causing massive leakages of revenue, as various reports of the Auditor-General have shown.

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.”

Monstrous Debt-Trap

Dr. Obeng-Okon, who is also the Chief Executive Officer of Cidan Investments Limited, 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 credit rating further downwards.

By  Masahudu Ankiilu Kunateh

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