Will Government Heed To Advice To Cut Borrowing?

The government of Ghana attempt to float the fifth Eurobond fortnight ago received a lukewarm response from investors on the international market. This forced the Finance Ministry to withdraw the sale.

The situation highlighted investors’ sentiments about the health of the Ghanaian economy which appears to be in a debt trap.

The dramatic slowdown in economic growth, combined with low commodity prices and the concern over government spending in an election year, have meant that, it is a difficult time to invest in Ghana.

However, the Finance Ministry said that, “the government will continue to build on this dialog with international investors while monitoring the markets and the IMF Board process with respect to the Third Review of the Program and will issue new notes at the optional time and the right conditions.”

Financial Analysts have said living on borrowing is a dangerous policy for the country and for the government. The current cycle of Ghana’s can be deduced as this scenario: ‘borrow for short-term measures and keep the ball rolling till it hits a snag to restart with another borrowing.’ Living on the edge is a seeming mantra of the government.

In this light, several economists and think-tanks have pressured the government cut the rate of borrowing and rather focus on increasing internal generated funds.

The Institute for Fiscal Studies (IFS) has pressed for government to review its borrowing plans for 2016 to limit the interest cost burden and associated risks.

This is part of the institute’s recommendations after analyzing the 2016 supplementary budget.

According to the Institute, the increased borrowing, especially given the interest payment, would only worsen the situation thus the need for government to reconsider its borrowing for the year.

The IFS reveals that the prevailing weak economic conditions in the country are likely to continue until the end of the year. It said, this it attributed to the weak economic growth, high inflation as well as debt unsustainability among others.

It has therefore, described government's 2016 Gross Domestic Product (GDP) growth estimate from 5.4 percent to 4.1 percent as rather worrying.

However, the government, last week, dismissed rumors that it has abandoned its decision to issue yet another Eurobond this year.

According to Finance Minister, Seth Terkper, government is still considering the various markets and devise strategies to pay off maturing debts.

“What we did was to suspend pricing because considering the money in the stabilization fund and the bonds that were issued last year, we took off the [2016] bond because the prices that we were seeing were not right,” he stated.

Mr. Terkper added that the creation of the sinking fund has rather helped the country to meet some of its debt settlement obligations, adding that he is hopeful government will strike a good deal when market conditions normalize.

“With the stabilization we have been able to create the sinking fund whenever we put a cap on the stabilization fund, in order that we can use it as one of the instruments for tackling our debts problem. We have already used 33 million dollars of the sinking fund to buy securities for the first time Ghana has bought its own bonds on the secondary market,”

“It is this fund that enabled us to suspend pricing we did not call off the 2016 Eurobond as was widely circulated,” he further stressed.

Government early this month, suspended plans to issue its fifth Eurobond to raise about US$700 million; proceeds of which were to be used to retire the country’s first Eurobond which matures next year.

A statement from the Ministry explained that the decision had been put on hold until such a time that market conditions are right.

Earlier, some economists had warned government will be unable to get a lower rate than its last Eurobond which attracted a coupon rate of 10.75 percent if it fails to issue the bond in the first quarter of this year.

Ghana’s rising debt levels, economic challenges, upcoming elections and huge budget deficit were expected to influence the coupon rate for this Eurobond.

Ghana’s program with the IMF – the Extended Credit Facility program is expected to address Ghana’s high debt levels as well as huge budget deficit but parliament early this week rejected one of the IMF’s conditions – zero financing of government’s budget from the central bank, which was aimed at dealing with the debt levels.

An economics school of thought holds the view that, the Eurobond is a friendly money and its influx in an economy is merely a short term arrangement whose effect will fade if underlying fundamentals are not fixed. A healthy economy allows for availability of cheaper credit, thus increasing the influx of foreign investment however, when this trend fails to run their course Eurobond becomes expensive.

Maybe we need to accept that the global market has picked up the fact that Ghana’s economy is not doing better than when some previous bonds were issued. Investors know that Ghana is building foreign currency reserves by borrowing. Our high borrowing cost suggests that the international investors do not believe in the IMF reports on the health of Ghana’s economy.

Many have said the overall direction of the economic policy piling up our debt stock is always likely to lead to troubling consequences in the times ahead. Hence, they want government to be bullish in tackling fundamental economic issues and also make tough fiscal choices.

Ghana’s debt is reaching worrisome levels where any further debt accumulation and monies borrowed resulting in productivity benefits can push the country down a vicious debt trap.

We all know that many of the loans received in recent years have been used to simply pay interest and principal debt. Our next generation would be the ones to face this dire consequence of recycling debt payments.

The question is: why is Ghana not generating means to raise enough revenue as a state? Why hoes Ghana have to borrow more to always pay maturing debt?

We expect that the chunk of monies received must be spent on cheap production, jobs, education, stable supply of electricity, fighting corruption, expansion of irrigation systems and building of state factories.

The good direction of the economy would play a role in determining future borrowing costs, a reason government must seek to address structural bottlenecks. If government thinks the Eurobond is the way forward, then it must work hard to invigorate the economy to woo investors at any given time.

This means whenever the Finance Ministry goes on a roadshow to launch a bond, Ghana must go to the market on the backdrop of a good track record of economic management. Investors are always appreciative of progress made in stabilizing an economy with reforms carried out in critical sectors like energy, privatization, tax administration and investment climate.

In reality, we know government’s commitment to good economic growth but when investors show such lukewarm response it also highlights government’s lack of commitment to structural reforms hampering economic growth.