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Ghs198 Bill Debt Stock Of Ghana; Revenue To Debt Servicing Weak; Government On Borrowing Spree

Feature Article Ghs198 Bill Debt Stock Of Ghana; Revenue To Debt Servicing Weak; Government On Borrowing Spree
JUL 5, 2019 LISTEN

As at the end of March 2019, Ghana’s total national debt stock stood at GHS198bill amidst the very weak domestic revenue mobilization and slow pace export growth. The high level and growing government borrowing is a great concern to both the private sector and the international stakeholders. The government in just two and half years have added some GHS76bill to the debt stock since it came into office.Unfortunately,there is nothing significant in the form of investment (infrastructure) to show of all these borrowing.

The two major concerns are the revenue to debt servicing ratio is very low and export to debt servicing also very weak. This situation is gradually trapping Ghana into a debt stress zone and its very worrying is remedial steps are not taken immediately by the government to mitigate the risk associated with it.

Government needs to intensify its efforts to widen the tax base to capture a lot more Ghanaians into the tax instead of overburdening the existing tax payer with high tax.one the export front, government should put in policies to incentivize farmers and create a market for the farmers outside Ghana.

Debt is like a nuclear energy that can serve a good or bad purpose. Not surprising that discussions about Ghana’s ballooning debt stock has become a major political debate and a concern to most citizens. To a certain extent, borrowing to invest into capital projects to generate revenue is good but not to borrow for consumption and payment of interests as it is the case of Ghana. For example, if the government of Ghana borrows $2bill for infrastructure development or construction of roads in the farming areas, that is good debt that reaps social, financial and economic reward. If that same borrowed funds is used to pay wages and salaries and to pay interest on debt, then that becomes a concern which must be addressed.

It is important that any borrowing by government must have a specific purpose and specific objective rewards in the interest of the citizenry. The financial or economic consideration for the borrowing must be projected for both the tenor of the loan and the substantial portion of the life span of the project.

Exhibit 2: DEBT TO GDP RATIO AS DEC.2018

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Why the GHS198bill National Debt Matters, Here is what government should be concerned about

Revenue mobilization is a daunting task, and the persistent shortfall in revenue outturn as against expected target is a major concern for the government as there is huge pressure on expenditure demands. Total revenue for the period, stood at GH¢10.1billion against government expenditure GH¢16.5billion.With a projected budget deficit of about GHS14.5billion (4.2% of GDP) which government intends to funds with borrowing of some GHS4.7billion in domestic and GHS9.8billion from external. Unfortunately, efforts to increase revenue mobilization still looks obfuscate and this poses significant threat to debt sustainability.

There are several potential problems with high and growing levels of government debt and borrowing especially with developing countries like ours. These may include; high debt interest payments, crowding out, high taxes in the future, inflationary pressures, economy vulnerable to capital flight and increase in banking interest rates.

High Debt Interest Payments

As government borrowing surge up, interest payments on the loans also increase which means, in effect government needs to commit a larger portion of its resources (mobilized revenue) in paying the holders of the bonds.

The country in 2018 spent GHS14.9bill of its total resources in paying interest on public debt and GHS19.5bill on employee compensations which is 6.2% and 8.1% of GDP respectively.

The impact of high government borrowing also affects interest rates within the banking sector.i.e. Most often than not, higher government borrowing can push up interest rates since the market may be nervous about governments’ ability and capacity to repay. This normally creates a situation where the market demands higher bond yields/interest rate in return to compensate for the risk. For example, in 2001/02 where Ghana’s debt to GDP was above 78%, the market demanded very higher yields on bonds. A similar situation occurred in the Eurozone in 2011/12 because there was no real lender of last resort. In such periods of high inflation, investors will also demand higher bond yields. This may lead to reduced spending and investment in the economy by both the private sector and individuals.

Financial Crowding Out

High government borrowing from the private sector reduces capital available to them for spending and investment. Mostly, government offers higher bond yields to attract the market and crowd out money for it use. Although government may have money to spend, private sector spending may fall which would impacts on economic activities in the economy.

Higher Taxes in the Future

The growing high level of government borrowing cause Debt to GDP ratio to increase and this may eventually result in higher debt interest payment by the government.in situations where government revenue mobilization is stagnating as it is the case of Ghana, the only way out is for government to increase taxes and this will slow down economic activities in the economy and may impact on economic conditions of the citizens.

©Jerry.J.AFOLABI is a Financial & Economic expert who believes that ordinary people can do extraordinary things when given opportunity. He is a Change Maker with the ability of easily getting people to get things done for the good of humanity.Email;[email protected]/0541238987

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