Implications of rising interest costs
One important feature of fiscal management in Ghana in the last few years has been the rapid rise in government borrowing, not just a rise in real debt but also a rise in debt/GDP ratio, pushing the country into a debt trap.
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With the country posting double-digit fiscal deficits in three consecutive years since 2012 and financed through increased indebtedness, the government is now confronted with a huge and increasing interest payment burden.
Interest costs to the government are now higher than capital expenditure and threatening to equal or even overtake wages and salaries if public borrowing is not slowed down. Interest payment has become a major factor behind the country’s fiscal deterioration besides wages and salaries, requiring serious attention.
This paper looks at the trends in interest costs to the government, causes, and what needs to be done to ensure an efficient management of the country’s debt.
Interest costs: trends and dynamics
Total interest payment, which stood at GH¢1.03 billion or 2.8 per cent of GDP in 2009 had by 2012 reached GH¢2.44 billion or 3.2 per cent of GDP and GH¢4.40 billion or 4.7 per cent of GDP in 2013. The outturn of total interest payment in 2014 was GH¢7.08 billion, equivalent to 6.2 per cent of GDP. The projected outturn of interest payment in 2015 is GH¢9.35 billion, equivalent to 7.0 per cent of GDP, and GH¢0.49 billion in 2016, equivalent to 6.6 per cent of GDP.
This means that between 2009 and 2012, interest payments increased by GH¢1.41 billion or 137 per cent and between 2012 and 2016, it is projected to increase by GH¢8.05 billion or 330 per cent.
Interest payments accounted for an average of 18.4 per cent of domestic revenue in 2009-2010, dropped to an average of 14.8 per cent in 2011-2012, but rose to an average of 30.3 per cent in 2014-2015. In 2016, interest payment is projected to absorb 28.8 per cent of total domestic revenue.
This means that for every GH₵1 to be collected as domestic revenue, GH₵0.29 would go into interest payment, leaving the rest for other recurrent expenditures, including wages and salaries, other statutory demands such as transfers to government units, and the much needed capital expenditure.
In fact, the 6.2 per cent of GDP interest payments made in 2014, the projected 7.0 per cent in 2015, and 6.6 per cent in 2016 will be three successive years since 2000 that total interest payments would be larger than total capital expenditure.
Interest payments for the first five months of this year totaled GH¢3.3 billion, reflecting 8.7 per cent lower than the budget estimate of GH¢3.6 billion. According to the government, the lower interest payment was partly due to the lower than estimated domestic borrowing to finance the budget during the period.
In the 2016 Budget, interest payments are estimated at GH¢10.5 billion compared to the projected GH¢11.7 billion wages and salaries costs. The estimated interest payments in 2016 is equal to 28.8 per cent of the projected domestic revenue in the year, 24.1 per cent of total expenditure, and 57.1 per cent more than the projected capital expenditure which is at the center of economic growth and development.
Ghana seems to have fallen into a debt trap as real interest rates continue to surpass GDP growth rates, suggesting that interest payments will probably be financed through additions to public debt or at the expense of other key government operations. In fact, if the government continues to contract loans at prevailing high interest rates, interest payments on them could be equal to or outstrip the public sector wage bill. Total interest payments for this year is projected at GH¢9.6 billion.
According to Fitch Ratings (2015), the country's interest burden is the highest amongst its rated sub-Saharan African countries. Other analysts also describe as worrying the escalating interest on the country’s debts.
The situation is alarming because very soon the country will have to use nearly one-third of the domestic revenues it generates to pay interest on public debt. This points to the need to slow down public borrowing unless such debts are used to finance projects that can generate income within a reasonable period to pay off the debts.
The decision by the government to implement an interest rate hedging to allow for enhanced predictability of debt-service is, therefore, commendable.
Causes of rising interest costs
Interest costs have risen astronomically in recent years in Ghana due to the large budget deficits registered over the years, especially since 2012, which were financed by borrowed funds from both domestic and foreign sources at high interest rates.
In addition to increases in the debt stock itself, rising interest costs are the result of interest rates hikes and exchange rate depreciation.
High budget deficits
Ghana has experienced budget deficits for many years, but double digit fiscal deficits have been posted since 2012. The fiscal deficit in 2012 was GH₵8.6 billion, equivalent to 11.5 per cent of GDP. In 2013, the fiscal deficit increased to GH¢9.5 billion, equivalent to 10.1 per cent of GDP, despite the number of revenue and expenditure measures introduced in the year.
Adverse developments in the global commodity prices and overruns in the wage bill, energy subsidies, and rising interest costs made it impossible for the fiscal deficit target of 9.0 per cent for the year to be achieved (Government of Ghana, 2015).
In 2014, the deficit stood at GH¢0.6 billion also equivalent to 10.2 per cent of GDP, despite the modest fiscal consolidation efforts achieved since mid-2013. These efforts were however undermined by policy slippages, increasing debt-service and external shocks.
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And despite higher oil revenue, improved tax collection and some containment of the wage bill, delays in implementing some adjustment measures and unbudgeted wage allowances resulted in the higher-than-budgeted fiscal deficit in 2014.
Additional domestic arrears were also accumulated and the overall fiscal deficit on a commitment basis remained close to 10.0 per cent of GDP.
In addition, the government started facing financing difficulties which led it to increasingly resort to short-term domestic debt, carrying interest rates of around 25 per cent and 26 per cent and significant monetary financing.
Despite the increased resort to domestic borrowing, external borrowing continued to be important, especially from 2013.
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A US$1 billion Eurobond was successfully issued in September 2013 and another US$1.0 billion issued in September 2014, but all at significantly higher interest rates than other issuers in sub-Saharan Africa due to the high risks associated with the country’s fiscal imbalances (IMF, April 2015).
The fiscal deficit (on cash basis) during the first five.