The World Bank and International Monetary Fund (IMF) have maintained Ghana is being high risk of debt distress despite recent debt management strategies and expansion of the economy.
This was captured in the latest Debt Sustainability Analysis (DSA) released by the two Washington-based institutions.
This DSA concludes that Ghana’s risks of external and overall debt distress continue to be assessed as high.
While the rebased nominal GDP significantly improved the public debt to-GDP ratios (albeit remaining elevated), the debt service ratios continue to breach their respective thresholds under the baseline, reflecting underlying vulnerabilities.
The two institutions maintained that a downward trend in the total public debt-GDP ratio was interrupted in 2018, as a result of the realization of significant contingent liabilities in the banking sectors.
What is High Risk of Debt Distress?
The IMF /World BANK Debt Sustainability Analysis is seen as a structure to guide the borrowing needs of low-income countries in a way that matches their financing needs with current and prospective repayment ability.
It generally looks at one or more thresholds that have been breached under the baseline scenario, but the country does not currently face any repayment difficulties.
Some have also argued that it’s warning to the country in question that if steps are taken deal with its rising debt, it could soon be classified as a debt distress country or get into that status.
This should mean that the country in question could be experiencing difficulties in serving its debts or getting into distress. The two institutions looked at these indicators in classifying the various countries.
In assessing the country’s ability to pay its debt, the IMF and World Bank do not only look at the Debt-to-GDP-Ratio,
• Present Value of Debt to GDP Ratio
• Present Value of Debt to Exports Ratio
• Present Value of Debt to Revenue Ratio
• Debt Service to Revenue Ratio
Ghana and the Debt Sustainability classification
Another report issued by World Bank says Ghana remains at high risk of debt distress, even though external debt indicators have significantly improved relative to the previous DSA on account of a based GDP, but vulnerabilities associated with debt service remain.
The World Bank in its Economic Update Report noted that two out of four indicators–debt service to exports and debt service to revenue—are in breach of the thresholds under the baseline.
The debt outlook remains sensitive to standard shocks under the DSA.
The standard stress tests suggest that Ghana is particularly vulnerable to a decline in exports, confirming the need to diversify the economy and increase resilience to external shocks.
Government and Rising Debt numbers
Government has however argued that the measures that it is implementing would soon yield the desired results.
Finance Minister Ken Ofori-Atta in a recent interview told JoyBusiness that some of these strategies even though is taking time would result in the situation improve very soon.
He, however, maintained that rising debt stock can be attributed to the management of legacy issues rather than questionable expenditure, “some of these fresh borrowings was rather meant to manage the situation and not because we were borrowing to spend on stuff that was captured in the budget.”
According to data from the Bank of Ghana, the country’s total debt stock has reached GH¢198 billion ending March 2019.
Reactions to the DSA report
Economist Professor Peter Quartey has told JOYBUSINESS the development warrant some drastic actions to contain the situation.
He maintains the government must do more to improve revenue mobilization to help move the country to a moderate status.
Prof. Quartey, however, warned the situation could impact negatively on the cost of borrowing going forward.
Classification of Debt Sustainability Analysis
The Debt Sustainability Framework (DSF), therefore, classifies countries into one of three debt-carrying capacity categories (strong, medium, and weak), using a composite indicator, which draws on the country’s historical performance and outlook for real growth, reserves coverage, remittance inflows, and the state of the global environment in addition to the World Bank's Country Policy and Institutional Assessment (CPIA) index.
Different indicative thresholds for debt burdens are used depending on the country’s debt-carrying capacity. Thresholds corresponding to strong performers are highest, indicating that countries with good macroeconomic performance and policies, can generally handle greater debt accumulation.
Facts on countries classification
At the end of May 31 2019, seven countries are in debt distress, 25 countries including Ghana are at high risk, 26 countries are at moderate risk and 14 countries are at low risk of debt distress.
Why the IMF/World Bank do this review
The DSF has enabled the IMF and the World Bank to integrate debt issues more effectively into their analysis and policy advice. It has also allowed comparability across countries.
The DSF is important for the IMF’s assessment of macroeconomic stability, the long-term sustainability of fiscal policy, and overall debt sustainability.
Furthermore, debt sustainability assessments are taken into account to determine access to IMF financing, as well as for the design of debt limits in Fund-supported programs, while the World Bank uses it to determine the share of grants and loans in its assistance to each Low-Income Countries (LICs) and to design non-concessional borrowing limits.
The effectiveness of the DSF in preventing excessive debt accumulation hinges on its broad use by borrowers and creditors.
LICs are encouraged to use the DSF or a similar framework as a first step toward developing medium-term debt strategies.
Creditors are encouraged to incorporate debt sustainability assessments into their lending decisions.
In this way, the framework should help LICs raise the finance they need to meet the Sustainable Development Goals (SDGs), including through grants when the ability to service debt is limited.
Key reforms that took effect in July 2018 include:
(i) moving away from relying exclusively on the CPIA to classify countries’ debt-carrying capacity, and instead of using a composite measure based on a set of economic variables;
(ii) introducing realism tools to scrutinize baseline projections;
(iii) Recalibrating standardized stress tests while adding tailored scenario stress tests on contingent liabilities, natural disasters, commodity prices shock, and market-financing shock; and
(iv) Providing a richer characterization of debt vulnerabilities (including those from domestic debt and market financing) and better discrimination across countries within the moderate risk category.