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22.05.2007 Business & Finance

Government cautioned against external borrowing

By D. Guide

Government has been cautioned against excessive borrowing from international sources.

Donald Kaberuka, president of the African Development Bank, who gave the warning at the bank's 42nd Board of Governors' annual general meeting (AGM) in Shanghai, China, noted that the phenomenon could lead to another pile-up of unserviceable debt, should proceeds be invested unwisely.

He made the comment following Ghana's decision to tap the eurobond market in July, which underlined global appetite for emerging market debt but fanned a controversy over whether developing countries that had won debt relief should risk piling up new borrowings.

Mr Kaberuka said, “The challenge to us all is that of ensuring that countries are able to access resources that do not impose unsustainable debt burdens and compromise their longer-term external viability.”

But Finance and Economic Planning Minister, Kwadwo Baah-Wiredu, who spoke to journalists, stressed: “We are taking our time to go through everything in May and June so that by July, the lead managers and others can then go on to the market.”

The long-awaited issue, the first by a sub-Saharan sovereign outside South Africa since the 1970s, was likely to be followed later in the year by Nigeria, according to participants at the annual meeting of the African Development Bank.

He said lead managers, UBS and Citigroup, had been mandated to raise between $500 million and $750 million for the West African country, which planned to use the money to develop its energy and telecommunications sectors and for housing and afforestation.

The economy is plagued by power shortages that economists say could make it hard for Ghana to meet its 6 percent growth target this year. Electricity rationing is also pushing up inflation.

Baah-Wiredu underlined that raising big sums in the bond market was the only way Ghana could finance its extensive infrastructure needs.

Stuart Culverhouse, chief economist at Exotix, an emerging markets brokerage in London, commenting on the move said, “Under the current favourable conditions, it will be very well received and most likely highly oversubscribed.”

Samuel Itam, a senior advisor at the IMF's Africa Department, who pointed out that borrowing decisions were up to governments, added that the IMF was concerned about unmanageable build-up of expensive new debt.

He said concessional finance, preferably grants, should be the first port of call for African countries, given the risk that foreign portfolio inflows could just as easily flow out again.

“Donor assistance has not been as robust as had been promised or envisaged, even under the programme that the IMF supported. Therefore, Ghana is faced with the challenge of trying to fill the resource gap,” he mentioned.

“Failing that, you must then see how you can raise money on the best terms possible. But in any event, we in the fund are advising both creditors as well as debtor countries, including Ghana, please do so within the debt sustainability framework to ensure that you're not going to go back to a serious debt situation.”

Under the Multilateral Debt Relief Initiative, the International Monetary Fund, World Bank and regional development banks have written off huge sums owed by poor countries. Ghana's total debt was cut by two-thirds last September to $2.1 billion.