A 20-year review of Ghana’s public debt; Trends, drivers, and implications (IX)
ACCORDING to the IMF, a country's debt is deemed sustainable if the government can meet all current and future payment obligations.
Historically, there has been a negative correlation between GDP growth and distressed debt. This has led to the focus on a country's GDP, and its components being analyzed to determine the sustainability of new and existing debt.
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In general, the debt to GDP ratio considered optimal on a long-term basis is estimated at 60 per cent for developed countries and 40 per cent for developing and emerging economies (Institute of Economic Affairs, 2015).
Ghana's debt to GDP ratio of 78 per cent as of March 2022 indicates a breach of this threshold. It is considered that interest payments above 26 per cent of government revenue for emerging economies will pose a significant challenge for the government and hurt the fiscal balance, raising the need for additional borrowing (Debrun and Kinda, 2016).
Since 2012, Ghana has exceeded this threshold, and interest payments to revenue ratio currently exceed 37 percent. The high-interest short-term domestic debt accounts for the growth in interest payments.
A sustainable fiscal policy would require that the primary surpluses respond positively to the debt to GDP ratio even under very weak conditions (Bohn, 1998).
The positive response of primary surpluses to the debt to GDP ratio means that the debt to GDP ratio should be mean-reverting (Bohn, 1998).
Debt sustainability would require the government to run primary surpluses. Ghana's debt to GDP ratio of 78 per cent is beyond the IMF's 40 per cent threshold for developing countries and heightens the focus on the ability of new and existing debt to generate higher economic growth, revenue, and exports.
Growth and interest rates
Growth and Interest Rates Since some of the debt accumulation is used to finance the expansion of productive capacity, it is expected that the resulting growth acceleration would enable the debtor country to sustain its debt payment obligations (Ndikumana et al., 2020).
A review of GDP growth rate and the interest rate on external debt is quite revealing. Since 2000, Ghana's GDP growth rate exceeded the average interest rate on external debt, suggesting sustainable debt growth.
However, the recent uptick in average interest rate relative to GDP growth is a worrying sign that our debt has reached an unsustainable territory, unless the momentum lost in GDP growth, due to the COVID-19 pandemic, is reversed.
IMF/World Bank Debt Sustainability Assessment
With respect to external debt, the current Debt Sustainability Assessment (DSA) report by the World Bank/IMF ranks Ghana as a medium performer with a debt carrying capacity benchmark of 55 per cent of GDP.
For the new Debt Sustainability Framework (DSF), external debt indicators have been streamlined to only four indicators, namely (i) Present Value (PV) of debt-to GDP ratio, (ii) Present Value (PV) of debt-to export ratio, (iii) Debt service-to-exports ratio and (iv) Debt service-to-revenue ratio (IMF, 2019).
A country's debt-carrying capacity is determined by five years of historical data and 5 years of country-specific and global projections.
Specifically, debt carrying capacity is based on Composite Indicator (CI), which includes Country Policy Institutional Assessment (CPIA) plus other macroeconomic variables (fundamentals).
The Composite Indicator (CI) is a weighted average of the country's CPIA score computed by the World Bank, the country's growth, reserves, remittances, and world growth.
On the basis of these thresholds and benchmarks, the overall assessment of debt distress is based on the following four categories: Low risk: when there are no breaches of thresholds; Moderate risk: when thresholds are breached in risk scenarios; High risk: when thresholds are breached in the baseline scenario; In Debt distress: when a distress event, like arrears or a restructuring, has occurred or is considered imminent
Sound Institutions and Policies Important for Public Debt Management Ghana’s dire debt situation, which the ongoing COVID-19 pandemic has further complicated, requires immediate action.
The importance of sound institutions and policies to help contain the economic fallouts from the COVID-19 crisis and position the country for robust recovery cannot be overemphasized.
Strong macroeconomic fundamentals, in particular, a strong rebound in economic growth, improved fiscal accounts with the government running positive budget balances, sound monetary policies with low and stable inflation and interest rates, stable exchange rates, and strong foreign reserves build-up, combined with effective debt management and policy coordination between debt management, fiscal and monetary policies are required to avert a debt crisis.
Public Debt Management in Ghana
The section utilizes information from published documents to illustrate the oversight and management of the public debt in Ghana.
Further, it provides a brief discussion about the importance of macroeconomic policy coordination for debt sustainability.
Policy Instrument
The government's policy instrument that governs public debt management is the Public Financial Management (PFM) Law (ACT 921, 2016).
The mission of ACT 921 is to "regulate the financial management of the public sector within a macroeconomic and fiscal framework; to define responsibilities of persons entrusted with the management and control of public funds, assets, liabilities, and resources, to ensure that public funds are sustainable and consistent with the level of public debt; to provide for accounting and audit of public funds and to provide for related matters."
In addition, to strengthen Ghana's fiscal transparency and accountability, the government also passed the PFM Regulation L.I. 2378 on March 12, 2019.
The stipulated regulations are to ensure more robust cash management, spending execution, and budget monitoring.
Government Entities Involved The management of public debt involves three main government entities: The Ministry of Finance, the Controller & Accountant General, and the Bank of Ghana, with oversight from the Parliament of Ghana.
The Ministry of Finance is the primary institution tasked with contracting government loans, coordinating and implementing government debt management policies.
The Controller & Accountant General is responsible for disbursing the resources and the provision of advice on accounting matters to the government.
In addition, the Ministry of Finance coordinates with the Bank of Ghana to report to the public and ensure prudent, efficient, and effective public debt management.
Coordination among the three main government entities is the responsibility of the Ministry of Finance. The Treasury and Debt Management Division (TDMD) of the Ministry of Finance coordinates with other divisions in the Ministry to analyze the country's debt sustainability and prepare the medium-term debt strategy.
The TDMD also coordinates with the Resource Mobilisation and External Relations Division (RMERD) to ensure effective implementation of the debt strategy regarding multilateral and bilateral loans, for which RMERD performs much of the front office functions.
The TDMD also coordinates with the Budget Division and the Controller and Accountant General's Department in assessing the government's financing needs and cash management and the payment of government debt obligations.
The TDMD coordinates with the Bank of Ghana in determining the domestic capital market and the auction and settlement of government debt securities. The Bank of Ghana handles external debt service payments on behalf of the Government of Ghana.
Ensuring financial accountability is the responsibility of the legislature and public audit institutions.
Public Awareness: Government borrowing and debt uses
The regular publication of the Budget documents (Statement of Economic and Financial Policies), the Medium-Term Debt Strategy document, Annual Public Debt Report, the Quarterly, and Annual Public Debt Statistics Bulletins, and the Bank of Ghana bi-monthly Monetary Press Release reports and Summary of Economic and Financial Data, keeps the public informed about government borrowing and debt-funded projects.
The public has the opportunity to review and comment on government borrowing.