Reduce appetite for external borrowing, economists urge govt, caution on the back of $3bn bond sale

BY: Kester Aburam Korankye
Ken Ofori-Atta — Minister of  Finance
Ken Ofori-Atta — Minister of Finance

With the scheduled exit from the Extended Credit Facility (ECF) programme under the International Monetary Fund (IMF) on April 2, some economists have cautioned the government to strictly heed the advice from the Breton Wood institution to drastically reduce its appetite for excessive foreign borrowing.

Instead, they strongly backed calls for the government to focus on improving Domestic Revenue Mobilisation (DRM) to consolidate the gains made under the programme.

The caution comes days after the government raised US$3 billion from foreign investors. The three-tranche bond sale received bids totalling US$21 billion.

Since November 2017, the national debt stock has shifted significantly towards foreign investors, with foreign component rising from GH¢75.1 billion in November 2017 to GH¢86.3 billion in November 2018.

This means that the external component of the national debt stock rose by 14.3 per cent within the period.

An Economist and Fiscal Policy Specialist at Oxfam Ghana, Dr Alex Ampaabeng, in an interview said the government must urgently find sustained ways of improving DRM to escape the trap of foreign-sourced debts which had long-term implications on the growth of the economy.

Given that the exit from the programme would give the government some fiscal space to operate, Dr Ampaabeng stressed the need for restraint and urged against the temptation of serious budget overruns prior to the 2020 general election.

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His caution is premised on history since 1992 where successive governments have woefully failed to keep to their budget limits, a situation which often derails gains made over a period.

“The answer lies within a strong DRM performance and sound economic management, reduction in off-budget spending and taking right measures to reduce our appetite for uncontrolled spending in election years,” he said.

Pointing to the IMF’s summing up statement after the combined seventh and eighth review of the four-year ECF programme which urged the government to intensify progress on structural reforms to help mitigate fiscal risks, Dr Ampaabeng advised the government to guarantee the independence of the Fiscal Council to enable it to serve the purpose for which it was established “and not to be a symbolic organisation”.

“We have the Economic Management Team, so we don't need another one, but a sound, independent Fiscal Council to help maintain fiscal discipline and ensure that we preserve the gains of the IMF ECF programme,” he said.

IMF didn’t change much

However, addressing the impact of the ECF on the country’s economy, an Economist with the University of Ghana Business School, Dr Patrick Asuming, in a separate interview said not much had changed with the country’s economy since the IMF programme began in 2015.

To him, the effect of the programme had not translated into the real sectors of the economy and also not transformed the fortunes of the poor.

“The significant change has been the fall in inflation in the last 28 months or so. The economy has been growing but that growth picked up almost 18 months after we started the programme and that growth was not because of the IMF but primarily because of oil, when the new oil fields came on board,” he said.

He explained that the IMF’s caution on the country’s reliance on foreign-sourced debts was worrying, given that the practice did not change four years under the ECF programme.

He said the concern was “a pretty serious thing coming from the IMF”.

“It explains why I don’t think much would have changed if we were still with the IMF because this is not the first time that the IMF has expressed that concern over our exposure to the international debt market; the IMF kept expressing it and yet every year we went on the market and borrowed,” he said.

On maintaining fiscal discipline, Dr Asuming said the exit from the IMF programme would not propel the government to overspend, explaining that “whatever overspending we will do after they have exited, chances are that we will do it anyway if they were there”.

“Don’t forget that after all the talk by the previous government we were still under the IMF programme and yet in the last election we still overrun our budget, and at every review we sought waivers for some targets we hadn’t met,” Dr Asuming said.

IMF caution

The IMF cautioned the government to be wary of foreign-sourced debts, explaining that the country's strong reliance on non-resident investors exposed it to global sentiments and increased foreign exchange exposure.

In its summing up statement after the combined seventh and eighth review of the ECF programme, the executive board of the fund said "reliance on foreign investors has increased Ghana’s exposure to market sentiment and exchange rate risk”.

The statement which was issued by the Deputy Managing Director of the IMF, Mr Tao Zhang, also said, “Debt collateralisation and revenue monetisation should be limited to avoid encumbering revenues.”