Government's efforts at fiscal consolidation risks being thrown out of gear if it continues to engage in further international borrowing, experts have warned.
The recent announcement of the issuing of yet another Eurobond (payable within 10 years) has elicited concerns from analysts even though businesses have welcomed the development as it is expected to free the domestic market for private firms to borrow from commercial banks.
The announcement comes in the wake of public anxiety over Ghana’s rising debt profile which now stands at GH¢76.1 billion (67.1 per cent of GDP) and the stark reality that the country’s macro-economic fundamentals are extremely weak.
Experts are worried over the timing of the Eurobond issue and the purpose for which the facility is being sought.
They describe as unfortunate the announcement that the $1billion from the Eurobond is to be used to settle maturing debts. According to them, “we should not borrow to pay debts because they only go to widen our deficit.”
“Government should not have the appetite to borrow at this time especially when our revenue inflows are seriously handicapped,” says Economist, Dr Osei Assibey of the Department of Economics, University of Ghana, Legon.
For a government that is trying to consolidate fiscally, it needs to reduce its expenditure significantly but if it keeps borrowing at high costs as it is doing, then efforts at consolidation will not achieve the desired results.
At a time that the country’s macro-economic indicators are weak, the risk profile in any loan arrangement will be high and could water down efforts at fiscal consolidation.
A statement from the Ministry of Finance to Parliament last week said taxes on domestic goods and services, on income and property could be lower than what the 2015 Budget estimated by GH¢358.7 million.
The Minister of Finance, Mr Seth Terkper revealed that total domestic revenue for 2015 is now estimated at GH¢27.8 billion down by GH¢3.1 billion while Ghana’s fiscal deficit for 2015 is set to widen from GH¢8.8billion to GH¢10 billion.
These new estimates, he attributed to the fall in crude oil prices, the current energy situation and the rapid depreciation of the cedi last year, all of which he indicated had negatively impacted on overall output.
Dr Assibey recalls that interest servicing on loans for last year was over US$600million, representing about 6 per cent of GDP, “which is higher than the expenditure on Education and Health Ministries put together.”
According to him, if borrowing continues at the existing rate, the international rating agencies are likely to soon classify Ghana as a country with a high risk of debt distress and thus compromise the country’s ability to raise further financing from the international capital markets, and worse still weaken Ghana’s ability to adequately service and pay its debts.
The economist explains that the effect of borrowing from the international market is that it widens the fiscal deficit and puts undue pressure on the country’s sources of revenue both domestic and international.
More importantly, strenuous efforts to repay loans contracted from the international bond market have the effect of causing the local currency to depreciate in favour of the dollar.
“We can only service the external debt through the use of the domestic currency and this will undoubtedly put pressure on the cedi and culminate in its depreciation against the dollar and other trading currencies,” he maintains.
Dr Assibey admonishes government to subscribe to long term borrowing as against borrowing for the short term, and “ when it gets to a point where debt sustainability becomes a challenge, it is important to look at the structure of borrowing and borrow at much lower cost.”
It will be recalled that in October last year, the International Monetary Fund (IMF) cautioned Ghana against piling up debts through excessive bonds issue.
According to Managing Director, Christine Lagarde, unless Ghana and other African states are borrowing from the international market to finance infrastructure, Eurobonds may not be a good thing.
"I think it (Eurobond issues) should be done with measure like everything. No excess, no abuse", she said.
In September, 2014, Ghana issued its third Eurobond to raise $1 billion. The bond which was oversubscribed has a 12-year maturity, with a coupon rate of 8.125 per cent.
Ms Lagarde said proper management of funds from bonds must be a crucial consideration among countries pursing that venture.
Investment consultant and lecturer with the Ghana Institute of Management and Public Administration GIMPA), Dr Raziel Obeng-Okon is however confident that the $1billion Eurobond would help restructure the country’s short-term liabilities into long-term obligations.
“It has the potential to reduce the total financial obligations of the country as longer maturities lead to smaller interest and principal repayments,” he adds.
Dr Obeng-Okon however maintains that borrowing to settle government debts usually does not grow the economy, and it is a signal that earlier amounts borrowed did not go into projects that could be self-financing or help in growing the GDP.
“Too much of the earlier borrowings were used to fund the administrative machinery of government including high interest payments on the debt. Thus, adding more to the debt stock without a corresponding increase in productivity or GDP,” Dr Obeng-Okon explains.
He finds it not surprising that the debt-to-GDP ratio continues spiralling upward, noting that government cannot immediately get out of the debt-trap because maturing obligations cannot be paid out of its relatively low revenue base.
“Restructuring of the debt from short- to long-term may bring some respite but can only be sustainable if the short-term relief is combined with strong fiscal consolidation,” the GIMPA lecturer notes.
He advises that while swapping old debt with new ones, it is important that any surplus of the new debt over and above the old debt goes into projects that are able to generate resources for repayment.
In spite of the doubts about government’s ability to achieve fiscal consolidation and be in a position to steer the economy out of the troubled waters, government has given a strong indication that measures outlined in its policy statement will put the economy on sound footing in the coming months.
Bold steps have been taken to slash the budgets of Ministries, Departments and Agencies by GH¢1.2 billion. It also reviewed government’s revenue and expenditure targets, while taking further steps to control the rising wage bill.
Deputy Minister of Finance Ato Forson, says the measures will result in donors and foreign investors reacting positively.
“What we are saying today is that we have been prudent, we have identified what may increase the deficit; we have identified what may lead to a possible slippage and are doing all we can to hold it in check,” he notes.
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