Govt’s borrowing unacceptable — Kotei Dzani
The level of government borrowing from the domestic market is “unacceptable”, the Group Chief Executive of Ideal Finance Holdings, Dr Nii Kotei Dzani, has said.
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He explained that the government was competing with banks and other financial institutions to borrow from the domestic market, making it unattractive for them to efficiently go about their lending, intermediation and credit creation functions.
“The government’s continued borrowing from the domestic market is worrying and unacceptable. They ask the financial institutions to reduce interest rates but it participates in the market and borrows at high interest rates. We cannot continue to borrow to undertake development financing, this must come from taxes,” Dr Dzani told the GRAPHIC BUSINESS on the sidelines of the inauguration of FirsTrust Savings and Loans, the new member of the Ideal Finance Holdings.
Ideal Finance took over the assets of Ezi Savings and Loans, which faced some liquidity challenges in the last few years. The new owners have so far injected GH¢8 million into the company, changed the working culture and is poised to occupy the financial services space where both banks and non-bank financial institutions have been shying away from – long term financing.
Dr Dzani’s comments on September 30 coincided with the GRAPHIC BUSINESS’ report the same day that the government’s domestic borrowing through short dated instruments, mainly the treasury bills, had reached GH¢26 billion in just nine months, since January.
Domestic debt and deficit
The Minister of Finance, Mr Seth Terkper, reacting to the GRAPHIC BUSINESS story in a telephone interview on September 30 said the domestic borrowing figures should be put in context (of the 2014 Budget and Gross Domestic Product – GDP) and not quoted in isolation.
The 2014 Budget estimates a net domestic financing of the deficit to the tune of GH¢4.12 billion, equivalent to 3.9 per cent of GDP. The budget estimates an overall budget deficit of GH¢8.97 billion, equivalent to 8.5 per cent of GDP.
Domestic debt amounted to US$12.7 billion (GH¢24.9 billion) at end-September 2013, representing 54.1 per cent of public debt and 28.9 per cent of GDP). The stock shows an increase of about 27.1 per cent over the end-2012 domestic debt of US$9.99 billion. At the end of December 2013, domestic debt amounted to GH¢27.25 billion (US$12,559.45 million), representing 52.28 per cent of total public debt.
Between January and September 2013, the government paid interest totaling GH¢3.28 billion, 39.5 per cent higher than the budget target of GH¢2.35 billion and 111.1 per cent higher than the outturn for the corresponding period in 2012. Of this amount, domestic interest was 47.2 per cent, higher than the budget target. Domestic interest grew by 140.4 per cent year-on-year, reflecting very high domestic borrowing in 2012 to finance the deficit.
The high domestic borrowing has been squeezing lending by financial institutions to the private sector, as the low-risk but higher yielding government securities become more rewarding to invest in.
The growth in the net domestic assets in the banking system largely reflected increases in claims on the private sector (GH¢6.14 billion or 46.1%), net claims on government (GH¢4.58 billion or 47.7 per cent) and claims on the public sector (GH¢2.48 billion or 144.7 per cent). Other items also increased by GH¢5.67 billion or 81.2 per cent.
In nominal terms, credit to the private sector recorded an annual growth of 26.6 per cent in September 2013, according to the 2014 Budget. This compares unfavourably with the 43.8 per cent growth in September 2012. In real terms, private sector credit grew by 13.1 per cent, down from 31.4 per cent in 2012.
Government raising money
Dr Dzani said the government needed to find innovative means to rope in the informal sector into the economy so as to shore up inflows from taxes, rather than taxing the same small number of individuals and entities.
“We need to broaden our tax network. Only a few pay taxes and this is not fair. Also, we cannot borrow to pay salaries so the government needs to find ways of roping every taxable Ghanaian into the tax net,” he stressed.
The private equity practitioner said long term borrowing such as the Eurobond were in the right direction, as it had the added advantage of injecting some forex exchange into the economy.
Graphic Business