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A 20-year review of Ghana's public debt: Trends, drivers and implications (VII)

BY: Graphic Business

Domestic debt stood at US$30.3 billion in 2021, representing 41.4 per cent of GDP, and 52 per cent of total public debt.

The high share of domestic debt in the total public debt stock was driven significantly by additional costs from the financial sector clean-up and the energy sector bonds.

In terms of maturity, there has been a gradual decline in the share of short-term debt in the total domestic debt stock, reaching 12 per cent in 2021 from a high of 45 per cent in 2015.

On the other hand, medium-term debt has risen sharply, reaching 63 per cent in 2021 from 30 per cent in 2015.

Long-term debt has remained relatively stable averaging 26 per cent from 2010 to 2021. The decline in short-term debt and the current rise in the share of medium-term debt should ease the pressure on debt service.

The Bank of Ghana and commercial banks represent the dominant holders of domestic debt. However, their combined share has declined significantly from 67 per cent in 2009 to 51 per cent as of 2021 (Figure 15). The share of the non-bank sector has risen 17 per cent in 2010 to 33 per cent in 2021 (Figure 15).

Contingent liabilities

The Ministry of Finance (MoF) has taken giant steps to recover all on-lent facilities owed to the government.

As a result, the total outstanding debt on-lent to various public entities at the end of December 2020 amounted to GH¢14,738.4 million (or US$2,569 million), out of which an amount of GH¢206.7 million (or US$36 million) were repayment arrears on existing on-lent loans provided to state owned enterprises (SOEs) and MoF in 2020.

The Ministry of Finance also reports that recovery of GH¢43.3 million (or US$7.5 million) was made on the on-lent portfolio in 2020.

There is an important issue with defunct loans on the government's books. Some financial assistance to the private sector and some SOEs via on-lending arrangements have not fully been paid back despite efforts by the Ministry of Finance and the Controller and Accountant General's Department (CAGD) to recover them.

Due to the strain on the government's limited resources from such expensive recovery efforts, compared with the amounts recovered, the Ministry of Finance, following the lead of the CAGD, in 2018 requested Cabinet and the Parliament for approval to write-off an amount of GH¢379.6 million (or US$79 million) loan receivable balances deemed non-recoverable.

The outstanding stock of government guarantees as of end-December 2020 amounted to about US$415.4 million (Table A6).

The Ministry has strengthened its credit risk assessment framework to prevent future potential risks incurred by the government in extending guarantees to entities (MoF, 2018, 2020).

Currently, contingent liabilities have arisen from two public-private partnerships (PPPs) projects. These projects are the National Identification Project (NIP) and the Teshie Nungua Desalination Project.

Amounts paid in 2020 for these contingent liabilities are US$4.23 million and US$19.9 million for the ongoing NIP and the Teshie Nungua Desalination Project, respectively.

Energy sector bonds

As part of the government's effort to deal with the energy sector debts owed by utility and downstream petroleum service providers to banks and trade creditors, E.S.L.A. Plc was incorporated in September 2017 as an independent special purpose vehicle to, among other things, issue debt securities to refinance the Energy Sector Debt (Ministry of Finance, 2018).

In conjunction with the Ministry of Finance, E.S.L.A. Plc successfully issued one of the biggest local currency corporate bonds in October 2017 (Ministry of Finance, 2018): a 7-year bond (value of GH¢2.41 billion or US$545 million) and a 10-year bond (value of GH¢2.4 billion or US$538 million) at coupon rates of 19.0 per cent and 19.5 per cent, respectively.

Tap-ins (reopening) on the 10-year bond in 2018 increased the bond value by an additional US$199 million (or GH¢880.7 million) that year.

In 2019 and 2020, total outstanding bonds issued by E.S.L.A. Plc were GH¢6.0 billion and GH¢1.63 billion, bringing the outstanding bonds to GH¢7.63 billion at the end of December 2020 (Ministry of Finance, 2020).

Debt servicing

Debt Service Available data shows the total debt service increased substantially to US$2.7 billion (12.0 per cent of exports) in 2020 from US$2.2 billion (8.4 per cent of exports) a year earlier, representing a 25 per cent increase. Debt service is expected to increase with the recent debt accumulation.

An important driver of the debt burden acceleration has been a rapid increase in interest payments over recent years. Interest payments have increased substantially as a share of government revenue as well as a ratio to GDP.

The interest payment to revenue ratio more than tripled from 16.5 per cent to 55 per cent between 2011 to 2020. Between 2020 and June 2021, interest payment to revenue ratio increased to 64.5 per cent.

The key driver in the increase in interest payments is the domestic debt component of total debt. Interest payments on domestic debt have consistently remained above 70 per cent of total interest payments (79 per cent in 2021) since 2008.

Interest expenses on domestic debt amounted to GH¢26.4 billion in December 2021, compared to GH¢7.1 billion on external debt.

The total interest paid by the end of March 2022 is GH¢10.6 billion. The 2022 budget projects interest payments to be GH¢37.4 billion, representing 27.2 per cent of the 2022 budgeted total government expenditure, and the largest expenditure item for the year.