Advertisement

IMF Managing Director Christine Lagarde
IMF Managing Director Christine Lagarde

The IMF’s call for domestic borrowing: A menace or economic remedy?

In a statement towards the discussion of the Article IV Consultation for the fourth review of the three-year Extended Credit Facility (ECF), the International Monetary Fund (IMF) opined that the domestic debt strategy adopted by the government to meet their short and medium-term financing needs was a prudent strategy.

However, one would obviously wonder if this decision is not in sharp contrast to the economic intent of this government (thus growing the private sector).


In fact, it is an undisputable truth that debt plays a very important part in the finance of corporate entities, especially in the ever complex and fast evolving business environment that businesses face today. There is always the need to know, understand and adequately finance their businesses with the right portions of debt that yield the best returns to the country and businesses as a whole.

In this regard, it is common for various sovereign states and businesses to prepare deficit budgets.  A deficit budget is explained as a budget which has excess of expenditure over income, hence the problem is created as to how to finance the deficits which can be through either grants or debt.

Ghana is one of the nations that prepare deficit budget finance; it is worth stating that the most recent budget read on Tuesday, March 2, 2017, similar to all other budgets in the Fourth Republic, was a deficit budget with a deficit of 6.5 per cent which is expected to be financed mainly through the issue of debt instruments.

The public debt of Ghana is defined to include all borrowings by the central the government and those guaranteed by government for the benefit of State-owned Enterprises. Ghana’s debt stock is composed of domestic and foreign debt instruments. Domestic debts are debt instruments issued by the government to raise funds from its residents in its local currency, whereas external debts are debts issued to foreign lenders and are usually serviced in the currency in which the debts are issued.

However, it is worth noting that non-residents can participate in domestic debt transactions where the term of the debt is two  years or more; here they are considered domestic debt holders for the purpose of the transaction. In such arrangements, the foreign part bears all the currency risk which will be associated with the foreign exchange conversion.

Ghana's debt -to-GDP ratio from 2001 to 2016

Medium-term debt strategy

The appropriate mix of these two types of debts in the Ghanaian debt portfolio has been an issue of an unending national discussion both in Parliament and within the media space.

This has necessitated an interrogation into the current objective of the Government of Ghana to shift its attention to the domestic markets for the financing of its debt.

This is part of the governments’ medium-term debt management strategy which seeks to manage public debts at the lowest cost and maintain the debt at prudent levels of risk over the medium term. This article further seeks to tease out if the shift to the domestic market can sustain the government’s medium-term debt management objective to introduce new instruments to further lengthen the maturity profile of public debt, and its impact on the private sector.

In the current discussion, the government has set out to put a hold on the activities of fund-raising in the external debt market as it seeks to meet its borrowing needs from the domestic debt market.

This technique was actually employed in the year 2006 but could not be sustained as the government had to venture into the Eurobond market in 2007 in a quest to raise cheaper long-term funds.

Ten years on, the Government of Ghana is seeking to make another return to the strategy of focusing on financing its deficit from the domestic market while they temporarily halt borrowing from the external market. As can be deduced from the title of Professor Gyekye’s book, “The unexamined life is not worth leaving”; it is critical to ask if the factors that inform the adoption of this particular approach to financing the debt of the Government of Ghana in 2006 yielded the desired results.

It is necessary to know if it is worth the policy reconsideration. Will the economy grow from implementation of this policy? What is going to be done differently this time around? From historical events, this policy was considered and executed in 2006 but could not be sustained; by 2012, the Government of Ghana had started the huge borrowings from the External debt market.

HIPC programme

With the total debt stock reaching astronomical levels in 2000, the government of the day signed on to the Highly Indebted Poor Countries (HIPC) programme which facilitated the decline of the external and total debt stock to fairly sustainable levels in 2006.

By 2006, the government had borrowed more from the domestic market than the external market. This debt structure was not sustained for a long time as the trend reverted two years down the line. Since this period, the government continued to operate within these two markets at averagely equal levels until 2013 where the government lifted attention to fund arising from the external market.

The policy of 2006 is being fully implemented in 2017. The policy direction is to reduce the total debt stock but this is not to reduce the total stock but rather focus on the reduction of the external debt stock which seeks to meet the financing needs from the domestic market.

This policy has been commended by the International Monetary Fund (IMF) representatives in Ghana as it falls in line with their long-held opinion that, it is prudent that budget deficits be financed with domestic debt instruments.



The author is the Dean of the School of Graduate Studies, University of Professional Studies

Connect With Us : 0242202447 | 0551484843 | 0266361755 | 059 199 7513 |