Ghana’s government 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 interests on domestic loans, with the remaining GH¢1.5 billion earmarked for external debtors. In the 2014 fiscal year, the government spent GH¢6,604 as interest payments on loans.
The gargantuan 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 government, and that was created as a matter of deliberate strategy and policy choices.”
High Interest Payments
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 it 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 adjustments, in order to put the economy on a path of sustainable public debt in the medium-term.
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¢17.76.1 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!”
Best Option for Sustainable
When asked by the newspaper what is the best option for financing debts, Dr. Obeng-Okon answered: “The best option for a country is to plan its debt portfolio, such that it does not get to a stage where additional debts are used to fund existing debts plus interest.” He argued that debt funding must be used prudently to grow the productive capacity of the economy.
Dr. Obeng-Okon stressed: “Borrowing for long terms, such as 10 years, helps in restructuring our short-term liabilities into long term obligations, and this has the potential to reduce the total financial obligations of the country, as longer maturities leads to smaller interest and principal repayments.”
However, he said borrowing to settle government debts usually does not grow the economy, and it is a signal that earlier amounts borrowed did not go into projects that could be self-financing or help in growing the GDP.
According to him, too much of the earlier borrowings were used to fund the administrative machinery of the government, including high interest payments on the debt.
Thus, adding more to the debt stock without a corresponding increase in productivity or GDP. It is, therefore, not surprising that the debt-to-GDP ratio continues its spiral upward trend.
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 go into projects that can pay for itself. 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 down.
The IMF Deal
When questioned whether the interest payments contradict the IMF bailout, Dr. Obeng-Okon said: “Definitely, the implementation of the IMF deal will add credibility to Ghana’s debt restructuring. Obviously, restructuring the debt to create some fiscal space should not derail the fortunes of the IMF deal if it is combined with swift fiscal adjustments, in order to put the economy on the path of sustainability.”
African Eye News.com
