Will Ghana Go “HIPC” Again?

The issue of public debt in recent days has dominated the airwaves raising concern of Ghana going to “HIPC” again. The Ministry of Finance has deplored claims that, the country’s total public debt expressed in terms of its total productivity has reached unsustainable levels. The Deputy Minister of Finance; Hon. Ato Forson admitting that Ghana’s debt has not approached the 70% threshold which could make the country economy highly indebted and poor, the situation which it opted for the Highly Indebted Poor Countries (HIPC) initiative, a debt relief measure.

The International Monetary Fund (IMF) report after reviewing Ghana’s performance under the Extended Credit Facility program reiterated that, Ghana’s total public debt now exceeds pre-HIPC levels and projecting 75% debt to GDP ratio by close of year.

The HIPC initiative was initiated by the International Monetary Fund and the World Bank in 1996, following extensive lobbying by NGO’s and other bodies. It provides debt relief and low-interest loans to cancel or reduce external debt repayments to sustainable levels meaning they can repay debts in a timely fashion in the future. It provided debt relief to cash- strapped countries based on the implementation of poverty alleviation strategies prescribed by the IMF and World Bank.

To be considered for the HPIC initiative, countries must face an unsustainable debt burden which cannot be managed with traditional means. Ghana joined Highly Indebted Poor Countries (HIPC) in 2001. HPIC is defined as countries whose per capita income is less than $690 and at the time Ghana joined, per capita income was $390. At the time Ghana went to “HIPC”, debt to GDP ratio was around 113%. The question is; is Ghana’s debt unsustainable?

CURRENT DEVELOPMENTS
The Bank of Ghana served notice of government's intention to borrow Ghc25.42 billion from the domestic market within the first six months of 2015. The amount is twice the Ghc12.72 billion the government borrowed through the issuance of government's securities in the same period last year.

Between July and December, this year, Government intends to grab a whopping GH¢25.328 billion from investors both local and abroad in borrowings.

Ghana will this year issue its fourth Eurobond. On 23^rd July, 2015, the parliament of Ghana approved the request by the government to raise US$ 1.5 billion from the European Bond Market to support the 2015 budget and refinance domestic and external debts. US$500 million of the money raised will be used for liability management while the remaining US$ 1billion will be used to support programmes and projects under the 2015 budget.

On the uniqueness of the 2015 bond, the bond would be backed by sinking fund to be funded from the portion of the excess of the Stabilization Fund earmarked for debt amortization. The amortization and Sinking Fund plan is backed by the Petroleum Revenue Management Act, and will smoothen the redemption obligations between 2023 and 2026. Again, the 2015 bond issue would be backed by the World Bank policy Based Guarantee which would enable the bond to be issued with higher rating than the current sovereign guarantees thereby reducing the interest rate. The table below shows the public debt stock of Ghana since January, 2015. I think this is not a right time for government to start the road show because of the current developments on the international financial market.

BAILOUT PROGRAMME
In April, 2015, the Executive Board of the International Monetary Fund (IMF) approved a three-year arrangement under the External Credit Facility (ECF) for Ghana in an amount equivalent to SDR 664.20 million (180% of quota or about $918 million) with no interest rate and a repayment period of 10years to support the government medium-term economic reform program. The program aims at a sizable and frontloaded fiscal adjustment to restore debt sustainability, rebuild external buffers to increase resilience to shocks and enhance the effectiveness of monetary policy by limiting fiscal dominance. Will the bailout save Ghana from this huge public debt?

PUBLIC DEBT STOCK

Ghana’s total public debt rose to GHC 94.5 billion by end- June, equivalent to 71% of Gross Domestic Product GDP) up sharply from 67% the previous month due to currency depreciation. Public debt to Gross Domestic Product (GDP) increased from 59.9% in January, 2015 to 71.32% in June, 2015 and declined significantly to 62.3% in July, 2015.

Indeed, key of the fluctuation in public debt figures and ratio of public debt to GDP is the volatility in exchange rate. Ghana’s cedi depreciated by about 25% in the first six months of this year and a pass through appreciation against the major trading currencies in July and August and currently depreciating marginally.

ARE WE ALREADY THERE?
The big question that Ghanaians are asking is; is Ghana going to “HPIC” again? The Status of Ghana has changed. This country became a lower middle country in 2013 after rebasing in 2010 and per capita income is about $1,461.6. Ghana can be said to be highly indebted and going through debt stress. Debt in itself is not bad but it depends on what caused the surge in debt levels. When a country incurs debt to develop its productive capacity and infrastructure, it will aid growth in the short and long run. It is interesting to note that, Ghana’s economy grew by about 14% in 2011 whiles public debt was GHC23,707 billion by close of December, 2011. By close of July, 2015, public debt stood at GHC 83,179.8 with GDP growth target of 3.5% by close of year.

Looking at these analysis, it tells us that, Ghana’s outlook does not look too good. There is something fundamentally wrong with our economy and this is the time to take the bull by the horn. I would wish that government publishes all loans and the very projects they were used for. Going forward, government borrowing should be long-term and project based for those projects to pay for the loans by itself. Ghana can be described as debt distressed but not Highly Indebted Poor Country. HIPC is a programme by IMF and World Bank just like the Extended Credit Facility (ECF) which governments apply for.

In conclusion, public debt management must anchor on transparency and accountability, debt and risk management strategy, institutional framework and development and maintenance of efficient market for government securities. Excessive borrowing is not the way to go because it adds up to public debt. All the new debts government is putting on has the aim of retiring maturing debts and financing capital projects but it is unfortunate that, details of the projects and disbursements are not given periodically and sometimes the intent for which those loans are secured are not been used for. Government should be proactive in raising domestic revenues, right sizing the wage bill, diversifying the economy and fix energy supply deficits to foster economic growth and development.

AMOAH-DARKWAH EMMANUEL Ch.E, CEPA
0245683297
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