The announcement by the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) that the public debt stock as at the end of November 2020 has risen to GH¢286.9 billion is once again the subject of public debate about prudent management of the public debt stock.
The figure represents 74.4% of Ghana’s Gross Domestic Product (GDP).
The sustainability of the debt, how Ken Ofori-Atta managed it in the last four years compared to the situation before the New Patriotic Party (NPP) assumed office is sharply in focus.
Oftentimes, public debt arises when government spending is more than its revenue and therefore borrows either domestically and/or externally to close the gap.
Government budgets capture their spending plans against expected revenue on yearly basis and at all times account for legacy debts of past governments too.
As a result, a previous government legacy debts must always be carried on by a new government as arrears – which is well captured by the adage Government is a continuum.
Substantial arrears NPP government inherited
It is this practice that bequeath to President Akufo-Addo a substantial arrears owed to contractors and other government service providers in excess of GH₵11 billion of which auditor general validated only GH₵6 billion, energy sector pay or take contract commitments of over GH₵6 billion a year, and a financial sector toxic assets valued at over GH₵21billion.
Average interest above 20% under NDC
Also, the past government was on record to have borrowed heavily at the short-term end of the treasury market at average interest above 20%.
This was the state of finances that the Akufo-Addo-led government successfully turnaround in the past four years as affirmed by available development indicators.
It was within this difficult context that the success of Mr Ofori-Atta’s stewardship in containing the public debt and passing a Fiscal Responsibility Act and Financial Stabilisation Act must be analysed.
GH¢286.9bn public debt stock as at Nov. 2020
The public debt stock as at the end of November 2020 stood at GH¢286.9 billion, representing 74.4% of Ghana’s Gross Domestic Product (GDP) as against GH¢122.6 billion at the end of 2016.
Public debt more than tripled between 2012 and 2016
Looking back, between 2012 and 2016, the total public debt stock more than tripled from GH₵36 billion ($8.6bn) to GH₵122.6 billion ($29.3bn), representing a cumulative rise of 24.7% of GDP over the period (from 47.8% to 72.5%).
GH₵1bn of domestic debt maturing every week
This meant that on a weekly basis, about GH₵1 billion of already contracted domestic debt was maturing for Akufo-Addo-led NPP to look for funds to settle.
GH₵4bn domestic debt maturing every week
In fact, that meant about GH₵4 billion of domestic debt matured per month at a time when the country’s tax revenue per month was just about an average of GH₵2.2 billion.
World Bank Partial Risk Guarantee in 2015
The situation was so bad that for the first time in sub-Saharan Africa, Ghana obtained a World Bank Partial Risk Guarantee (PRG) to issue the Eurobond in 2015, mainly to refinance short-term domestic debt.
Touted expertise of NPP gets to work
In plain language, the touted expertise of the New Patriotic Party (NPP) government was needed to effectively deal with the problem of refinancing debts anytime they were due.
GH₵43.9bn expenditure for 2016 overspent to GH₵50.3bn
The total projected fiscal expenditure for 2016 was GH₵43.9 billion, representing 26% of the GDP; but it rather exceeded the target spending of GH₵50.3 billion, representing 30.2% of GDP.
Jubilee Debt Campaign in 2016 paints gloomy picture
A report, jointly published by seven organisations that constitute Jubilee Debt Campaign in 2016, revealed that Ghana was in a debt crisis because the country was losing around 30% of government revenue in external debt payments each year.
It attributed the situation to a combination of the fall in the price of commodities and the rapid pace at which loans were contracted and not being used well enough to ensure they could be repaid.
The authors said such huge payments were due to Ghana having borrowed more loans from institutions, such as the International Monetary Fund (IMF), which were used to pay mainly interest on debts that also caused the country’s debt stock to balloon in size.
To the Jubilee Debt Campaign report, the situation was expected to stay well above 20% of revenue until, at least, 2035.
Debt re-profiling agenda: 15-year bond issued in April
Faced with this situation upon assumption of office by the Nana Akufo-Addo-led NPP government, Mr Ofori-Atta announced a debt re-profiling agenda and Ghana issued the first 15-year bond in April and also issued a second seven-year bond.
GH₵612m interest savings in 2017 due to debt re-profiling
Provisional interest savings arising from government’s implementation of the liability management programme by re-profiling domestic debt was estimated at GH₵612 million for 2017.
Lowered rate of debt accumulation
This re-profiling ensured that Ghana’s debt stock was innovatively added on yearly basis at rather lowered rate of debt accumulation.
GH₵14bn interest paid on Ghana’s debt in 2016
The interest paid on Ghana’s debt was over GH₵14 billion in 2016 when the National Democratic Congress (NDC) government exited power.
GH₵80bn interest paid public debt in 4 years
Between 2017 and 2020, Ghana has paid over GH₵80 billion as interest on the public debt stock.
GHc14.9bn interest cost paid in 2017
Interest cost on these debts had increased from GH₵9.6 billion in 2015 to GHc14.9 billion in 2017.
The public debt stock as at the end of 2018 hit GH₵173.2 billion or $35.92 billion.
GH₵21.1bn interest cost paid in 2018
In 2018, of the GH₵37.8 billion raised in tax revenues, GH₵21.1 billion was used to service interest payments alone.
55% of tax revenue used to pay interest cost
This means that Ghana was spending close to 55% of tax revenue to service interests on past loans alone.
GH₵19.756bn interest cost paid in 2019
In 2019, interest payments cost the nation about GH₵19.756 billion on loans borrowed.
GH₵24bn interest cost for 2020
For the year 2020, Ghana was expected to pay about GH₵24 billion as interest on the public debt stock.
4 Items consume 99.6% of all government revenues
Data shows that Ghana’s revenues are consumed by wages and salaries, interest payments on amortisation and statutory payments, thus accounting for 99.6% of all government revenues.
3.4% growth rate inherited increased to 6.4%
Over the past four years, the government worked hard to grow the economy from the 3.4% growth rate it inherited to 6.4% growth rate before the incidence of COVID-19 in March 2020.
The strategy was to move Ghana beyond aid and improve on the living standards of all Ghanaians.
2015 and 2016 asset quality review revealed severe challenges
An asset quality review carried out by Bank of Ghana (BoG) in 2015 and 2016 revealed severe challenges with solvency, liquidity and asset quality in Ghana’s banking industry, with some banks obviously in serious difficulties to meet demands of customers.
Regulatory crackdown on banking industry
To address the situation and save the economy, a regulatory crackdown on poor business practices and weak capital positions in Ghana’s financial sector resulted in a series of market exits at the time.
Though this came at a high price, this necessary act has, however, made Ghana’s financial sector now more robust and sustainable with strong corporate governance structures.
Banking sector clean-up cost GH₵21.6bn
Indeed, Mr Ofori-Atta had to borrow GH₵21.6 billion to pay for the banking sector clean-up, created a financial architecture conducive for growth and protected 4.6 million depositors and 81,700 investors. This obviously has added to Ghana’s debt stock.
GH¢12bn in capacity charges paid
In the four years of governance, the NPP government also paid some GH¢12 billion in excess energy capacity charges inherited in 2017, and has kept the lights on.
GH¢11bn inherited outstanding arrears
It also has settled substantial part of the GH¢11 billion outstanding arrears bequeathed to it.
Government ambitious priority project
Simply, with Ghana’s tight fiscal space, coupled with budget rigidities, Mr Ofori-Atta, on assumption of office as Finance Minister in 2017, had to look for resources to pay for legacy debts and their associated high interest payments in addition to finding additional funds to execute government’s bold plans of Free Senior School (Free SHS), agricultural modernisation programmes such as Planting for Food and Jobs (PFJ), Rearing for Food and Jobs (RFJ), Planting for Export and Rural Development (PERD), One District, One Factory (1D1F), Nation Builders Corps (NABCO), among others.
GH¢15.7bn spent on funding govt’s ambitious priority project
Presenting expenditure on appropriation for January 1, 2020, to March 31, 2021 to Parliament, Mr Ofori-Atta announced that government has invested in excess of GH¢15.7 billion into its key flagship programmes.
“These flagship programmes, he said, are meant to lead to real economic transformation; strengthen human capital through enhancing access to healthcare, education and skills development, modernize agriculture and industry, deliver infrastructure across the country – including a revitalised railway sub-sector – and create decent jobs for the teaming unemployed youth and graduates.
Stabilisation of the Ghanaian cedi
Mr Ofori-Atta-led finance ministry’s ability to have better managed the country’s debt is evident in the stabilisation of the Ghanaian cedi against major trading currencies over the past four years.
Favourable credit ratings
It is also evident in the favourable credit ratings from Fitch and Moody’s and increase investor confidence in the economy due to increase in FDI inflows over the period.
Limiting rates of exchange on interest charges on foreign loans
In fact, the relative stability of the cedi alone helped save Ghana’s purse by limiting rates of exchange on interest charges on foreign denominated loans.
With higher expectations to bring the debt under control, COVID-19 emerged.
Analysts attribute the increasing cost of servicing the national debt in recent times to the shock occasioned by the coronavirus disease (COVID-19), which has caused revenues to fall substantially.
2021 Growth rate projected around 4%
From 0.9% growth rate as at end December of 2020, the country’s growth rate has been projected to be around 4% in 2021. This outlook further suggests the future looks bright in managing the nation’s public debt and the economy in general. The story can’t be told if it is not expressly stated that had it not been the government’s ability to have sustain debts levels, just like other nations, Ghana too would have been on its knees following the incidence of COVID-19.
The debt service cost, which refers to the payment of due portions of loans (amortisation) and the interest, remained high, resulting in a higher ratio when debt service cost was compared with total revenue.
Strategies to reverse the trend
The Ministry of Finance rolled out a number of solutions to help reverse the trend and reduce its impact on the economy.
Use of low-cost debts to retire comparatively costly ones
The measures include the use of low-cost debts to retire comparatively costly ones, the development of a robust domestic debt market to create space for low-cost debts.
Increased resort to bilateral and multilateral sources
It should also include an increased resort to bilateral and multilateral sources for loans without compromising on ensuring prudent level of risk.
COVID-19’s temporary reduction in revenue is a one-off increased expenditure to save lives and livelihoods and a temporary reduction in GDP.
GH¢100 CARES programme
The prospect for ensuring debt sustainability is well accounted for in the GH¢100 billion Ghana Coronavirus Alleviation & Revitalisation of Enterprises Support (CARES) programme.
Dwindling revenues against bettering the lot of citizens
The need to better the lot of citizens through government expenditure in the midst of dwindling revenues means government has to borrow and use the money well for the development of the country.
Mobilisation of resources
However, scarcity of resources and reduced financial capacity require the mobilisation of resources from all sources, including borrowing.
Though the debt stock seem to be on the rise, the fact still remains that had it not been the shock of COVID-19, the NPP government, from all indications and available economic figures, is seen to have better manage the country’s debt better.
What is the definition of Public Debt?
1. All over the world, a country’s public debt stock indicates how much the country owes in its local currency. By local currency, then exchange rate can affect the definition.
2. Usually, public debt usually relates to national debt. However, some countries include other state governments and State Owned Enterprises (SOEs).
3. In Ghana, the public debt refers to Central Government and the guarantees that Central Government gives to SOEs.
4. Public debt simply occurs as an accumulation of budget deficits. Budget deficits affect the debt stock and the debt stock also affect the budget deficit.
5. If public debt is an accumulation of budget deficits, then Public Debt may not always be a bad thing.
When Public debt is good
6. Public debt is good when in the short run, Government gets extra funding to fund projects and other investments for the necessary increased welfare and economic development as stated in Article 36 of the 1992 Constitution.
By this, the public debt allowed the NPP Government to support its flagship projects for roads, agriculture, health, railway, education and energy.
Domestic bonds are also considered as the safest investment for investors in Ghana and abroad.
This, also develops what the economists call the domestic bond market.
Thus, when utilized correctly, it provides adequate funding in the short run and should also provide long term capabilities to repay the loans.
7. Applying this to Ghana, Mr Ofori-Atta was able to promote the passage of the Fiscal Responsibility Law, the first of its kind in Ghana’s finance laws to restrict the budget deficit to 5% of GDP.
Considering his stewardship, the budget deficit as a percent of GDP was 4.8%, 3.9% and 4.8% for the period 2017 to 2019 respectively.
8. The COVID-19 effect which reduced revenues and GDP but increased expenditures increased the projected deficit to 11.4%.
This is what led to the Debt to GDP ratio of 74.4% as at November 2020.
As can be seen, the debt figures in 2020 are at short run high levels.
With the CARES programme being implemented, early signs of economic recovery is in the horizon.
9. Revenues are indicating early signs of receiver based on November 2020 numbers.
GDP for first 3 quarters may lead to higher growth than the original 0.9% for 2020.
Already, the international institutions are indicating that Ghana could grow at above 4% for 2021.
Comparing this to the NDC period, one can see that although the debt to GDP ratio has increased, it is based on reasons that one can call external health related shock that has hit the whole world.
10. The IMF in its latest updates on global public debt estimates end 2020 to reach 98 % of GDP, compared to their earlier projection excluding COVID-19 in 2019 of 84 % of GDP.
When public debt is bad
11. Public debt is bad when the level of debt reaches a point where investors demand for increased interest rates because they are afraid that the Government could default.
The demand for increased interest rate is a measure of default risk.
Although sometimes, this may not always be the reason for increased interest rates, but this has been a good guide for analysis.
12. Applying this into Ghana, Ofori-Atta has been able to ensure that the 91 day TBill rate which is a leading economic measure in this instance, was reduced to between 13.3% and 14.7% for the 4 year running of his stewardship.
This compares to the NDC period of above 20%, indicating that the debt levels of today are better viewed by investors than before.
Legacy liabilities that affected today’s public debt
13. There are also a number of factors that added up to Ghana’s public since 2017 and one of them was a legacy from the NDC period.
14. The Financial Sector bailout of about GH₵21 billion which on its own is about 5% of GDP is part of the debt stock.
15. The legacy of arrears which could be in the region of about 3% of GDP is also part of the Debt Stock.
16. The energy sector bailout which represents about $ 1 billion per annum and almost 2% of GDP is also part of the debt stock.
17. Despite all of these additions, Mr Ofori-Atta had to be innovative, by re-profiling the debt to reduce the cost and risk in the debt stock itself.
He had to redirect expenditures under the OBAATANPA budget and CARES programme to ensure that the economic indicators are strong enough to reduce debt in the short run.