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Recent statements by certain institutions and personalities about the management of Ghana’s public debt require a quick response in order to reverse the doom and gloom picture they tend to show.

There are some assertions and omissions therein that appear too sweeping to be allowed to go without a response from the managers of the economy.

Consequently, the Ministry of Finance has taken note of a statement by the Institute of Economic Affairs (IEA) on Ghana’s Public Debt situation (Daily Graphic, February 16, 2015, page 71), along with two publications by Dr Charles Amo-Yartey (the IMF’s Resident Representative in Sierra Leone and Liberia) on debt management and other elements of the nation’s fiscal policy (ref. IEA Monographs No. 37 and 39). 

The ministry would like to respond to the following sweeping assertions and omissions in the publications. 

Sweeping assertions

• That at the current rate of government borrowing, Ghana will be at the brink of financial collapse.

• That Ghana does not have fiscal rules or laws.

Omissions

• The projection for the debt/GDP ratio does not take into account the potential GDP growth. 

• Complete disregard of the fiscal stabilisers that have become active over the last few years. 

Response to the assertions

All nations borrow for major capital or infrastructure development. Therefore, the current focus of government policy is on “smart-borrowing” to sustain growth and development — without unduly increasing “pure” public debt. In the last two years, Ghana’s debt management posture and paradigm shifts have been informed by the following:

• Ghana has become a lower middle-income country (LMIC) and, therefore, needs to establish new processes and institutions or strengthen existing ones,  including those of debt and fiscal management;

• The country continues to have a big infrastructure gap that requires financing from diverse sources, including partnership and risk-sharing with the private sector — not just the public sector, as has been the practice for a very long time now;

• The need for infrastructure development is boosted further by the expansion of the services and agricultural sectors, as well as the discovery of oil and gas, that requires financing to put the country on the path to sustainable growth and development. 

Dwindling of the borrowing, fiscal space

Against this background, Ghana has seen the rapid dwindling of the borrowing and fiscal space that was created recently by the massive debt relief that was created by the decision to declare Ghana HIPC (highly indebted poor country) in 2001. Of particular relevance is the fact that, as a LMIC with the potential to move into the middle strata for middle-income countries, Ghana’s access to grants and concessional financing has also been dwindling slowly — and this will continue to be the case.

 It is obvious that we cannot continue the phenomenon of making taxpayers bear the full burden of loan repayments. Rather, the projects or the SOEs that government provides guarantees should take over the loan repayments. Hence, the more relevant question to ask ourselves is: how do we meet our energy, dam, road, water, harbour, airport, etc needs without falling into excessive debt — and at a time when our access to “soft” or concessional loans will fall substantially over time?

Impact of ‘Gang of Six’ on budget

The alternative of putting the total cost of huge infrastructure projects on our budget has been tried and it failed woefully. Prior to 2009, a significant value of infrastructure projects (notably the roads that we now call “Gang of 6”) was put on the national budget — even at a time when we had significant inflows of external resources from the HIPC programme. Indeed, we did this while also borrowing from external markets (e.g., EXIM Bank loans and issue of the nation’s first sovereign bond in 2007). Thus the notion that Ghana’s Annual Budget can support big projects did not work. 

Indeed, part of today’s fiscal pressure with high cost of domestic debt service emanates from the bonds that were issued between 2010 and 2012 to finance these projects. We have had to “refinance” these and other bonds, rather than pay them off fully, within the envisaged three-to-five or more years because of recent fiscal overruns and setbacks to the economy—but more importantly, the long-standing habit of not evolving a strategy for liquidating so-called foreign or domestic “bullet” loans or bonds. 

Ghana’s new debt management policy

The government has started to correct this anomaly with specific strategies in Ghana’s New Debt Management Policy that was approved by the Cabinet and Parliament in the 2013 through 2015 budgets — yet the IEA trajectory of debt completely ignores the potential impact of Ghana’s “New Debt Management Policy”. 

The IEA’s statements and publications do not include any references to these new debt policies. Rather they repeat the notion that the government has not taken the threat of excessive debt seriously. 

The measures that the government has been implementing are extensive and include the following:

• Use of dwindling grants and concessional financing: Since Ghana has become a middle-income country that will gradually lose substantial access to grants and concessional financing over the medium-to-long term, the government has decided to channel these resources to finance mainly social infrastructure, development and social protection programmes.

 • Commercial and quasi-commercial projects will be fully or partially “self-financing”: In contrast, non-concessional (or commercial) loans will be channeled to finance projects that must repay the loan, fully or partially, from the revenues generated. The goal is stop adding these loans to “pure public” debt that are paid by taxpayers directly through the Budget. Therefore, Ministry of Finance (MoF) has started applying this rule to existing loans that were used to finance commercial projects through its on-lending and Escrow programmes discussed below. 

These are mainly found in the following sectors: energy (e.g., gas/thermal plants, grid lines and dams), water (e.g. plants that service urban and small-towns) and transport (e.g., toll roads, airports, railway and harbours).

• On-lending and Escrow (debt service) account policy: To operationalise the “loan recovery” policy, the MoF has started signing on-lending agreements and opening joint Escrow/debt service accounts with SOEs that cannot borrow on their own balance sheet and rely heavily on the state to guarantee or contract loans on their behalf, including the Volta River Authority (VRA), the Ghana Water Company Limited (GWCL), the Ghana National Gas Company (GNGC), the Electricity Company of Ghana (ECG) and the Ghana Grid Company (GRIDCo), for them to start servicing the loans that were contracted on their behalf for commercial projects in the country. 

On-lending platform

Some new projects that have been placed on an on-lending platform include the Kumasi Market,the Accra Dredging and Site Development and Kpone Housing facility.

It is important to note that SOEs such as the Ghana Ports and Harbours Authority (GPHA), the Ghana Airports Company (GAC) and the Ghana National Petroleum Corporation (GNPC) are able to contract and service direct and government-guaranteed loans on their own balance sheet. 

While the VRA, GRIDCo and the Bui Power Authority borrow through the government, they follow VRA’s long-standing tradition of servicing the loans that the government contracts on their behalf. 

To reiterate, the ultimate goal is to apply the government’s loan and on-lending policy for ALL commercial and quasi commercial projects.

• Prudent public debt computation framework: While the current situation where Ghana includes all direct and government-guaranteed loans to SOEs, ministries, departments and agencies (MDAs) and metropolitan, municipal and district assemblies (MMDAs) in public debt may be prudent, it weighs too heavily on the taxpayer by encouraging SOEs to virtually ignore their debt-service obligations. 

There is, therefore, the need to change the rules and rigidly apply the on-lending and Escrow principles to projects with positive cash-flow and present value returns. Hence, in addition to SOEs, the policy will extend to non-commercial infrastructure projects that can make a positive contribution to loan repayments, as well as maintenance or replacement of equipment and other assets, from the fees and charges that consumers pay for the use of goods and services.

• Establishment of Ghana Infrastructure Investment Fund (GIIF): Earlier in the week, before the IEA released its statement and publications, President John Mahama had sworn in members of the GIIF Board and Advisory Committee. Suffice it to say that despite the one-year long process for setting up the GIIF, including the debate of its legislation in Parliament, the IEA statement and publications did not have a single mention of the potential of this fund. Yet, the goal is to use the fund to apply market-based principles to the way we contract loans for commercial infrastructure, in particular. 

The potential for the GIIF is obvious: the goal is to set up a “rated” agency, born out of our Petroleum Wealth Funds under the Petroleum Revenue Management Act (PRMA) (notably the ABFA), that can leverage the markets to support the nation’s borrowing for commercial infrastructure. As noted, these projects will be expected to repay the loans. Many countries such as Singapore, Libya, South Africa, Brazil, China and the UAE have sovereign wealth funds (SWFs) or development banks that facilitate borrowing for infrastructure development. More recent examples in Africa include Nigeria, Equatorial Guinea and Angola.

• Establishment of Sinking Fund Account: In the 2014 Budget, the government announced that it will “cap” the Ghana Stabilisation Fund (GSF), under the PRMA, at US$250 million to enable it to open Debt Service and Sinking Fund Accounts to start paying down the country’s “bullet” loans — notably treasury bills and medium- and long-term domestic and foreign (sovereign) bonds. Further details of the utilisation of the Petroleum Funds for this programme are provided later in this article. 

The Sinking Fund will be boosted by the repayments made for loans used to finance commercial projects, under the on-Lending and Escrow/debt service policies noted earlier. Again, for the first time in its history, the nation has started the process of setting up appropriate mechanisms or structures to amortize these “bullet” loans — rather than refinance them (as we have been doing with the 2017 Sovereign Bond). 

• Less reliance of sovereign guarantees: A major pitfall in contracting loans is virtually offering automatic sovereign guarantees for all major loans and projects. As noted, these include most viable commercial projects that several of our SOEs administer. In a major paradigm shift, the Cabinet has approved the setting up of SOE and project debt repayment accounts (discussed earlier), as well as the use of alternative loan guarantee and insurance instruments. In this regard, the government recently utilised a share of Ghana’s IDA resources to apply for the World Bank’s Partial Risk Guarantee (PRG) scheme to support GNPC’s off-take of gas under the SANKOFA [ENI-VITOL] fields development.

Further discussions are ongoing with the World Bank and with the African Development Bank (AfDB) to utilise more of these facilities to support the US Millennium Challenge Corporation (MCC) Compact II energy infrastructure programme, while minimising the risk of debt burden posed to the taxpayer by mitigating the loans and guarantees added to the pure public debt. These institutions have agreed to offer technical assistance and advice in using these alternative structures as well as the setting up of GIIF.

• SOE and project loans as contingent liabilities: When the on-lending and Escrow mechanisms are put in place, government will start to issue guarantees for default of payment, rather than full Sovereign Guarantee as happens now. Hence, Ghana’s debt sustainability analysis (DSA) will recognise the commercial loans on a “contingent liability” basis or take account of the underlying assets such as the balances in the debt service and escrow accounts — to determine the “net” (not the gross) liability. This will make Ghana’s DSA’s consistent with the approach used for middle-income countries.

• Moratorium on new loans and contracts: Mindful of the increase in public debt—and while in the process of setting up the alternative policies noted above—the government has placed a moratorium on the award of new contracts and loans, unless approved through an enhanced Cabinet process. In this regard, in analysing the increase in debt/GDP ratio, it is important to distinguish between the addition to the debt stock due to new loans and disbursements of existing loans that add to the debt stock. Other factors that affect this ratio include the growth in debt/GDP and exchange rate fluctuations (which affect the conversion of foreign-currency denominated loans).

Therefore, it is clear that one of the biggest omissions in the IEA statement and Dr Yartey’s publications is the complete non-recognition of the new debt management policies — notably the inauguration of the GIIF Board and Advisory Committee. On that occasion, President Mahama stressed the need to ensure that non-concessional loans were channelled to finance commercial projects to facilitate repayment — as happened with past major projects such as the Akosombo Dam and the Tema Harbour. Further, as announced in the 2015 Budget, the MoF will transfer all existing commercial loans/projects on public debt to GIIF to manage.

Fiscal framework

It is erroneous to assert that Ghana does not have fiscal rules or laws by simply pointing to gaps and ignoring the overall status quo. It is necessary to note the following legal contexts for public financial management in the country. We note that both the IEA and Dr Amo-Yartey did not make any reference to these sources in coming to the conclusions on the state of Ghana’s public debt and financial management. 

We mention a few of these laws and rules to buttress the point that the nation is not devoid of a fiscal framework.

• The 1992 Constitution: Chapter 13 [articles 174 to 189] of the 1992 Constitution is entirely devoted to public financial management [PFM]. These include Taxation [Art. 174]; Public Funds [Art. 175]; Public Funds [Art. 176-178]; expenditure management [Art. 179-180]; Loan and Public Debt [181-182]; and Audits [Art. 187-189]. Other elements include Central Bank and Foreign Exchange Dealings [Art.183 and 184]; and Statistical Service [Art. 185-186].

• The Financial Administration Act (FAA) (Act 654) and Financial Administration Regulations (LI 1802). Firstly, the parts and sections in the FAA and FAR, as they are commonly known, derive from the articles in the 1992 Constitution.

Secondly, the FAA and, as further elaborated in the FAR, has extensive and elaborate provisions covering all the areas highlighted in the IEA statement and publications. These include Control and Management of Public Funds (Part I); Public Funds [Part II]; Revenue and Expenditure [Part III]; Accounts and Audits [Part IV]; Statutory Corporations and Other Public Institutions [Part VI]; and Sanctions and Financial Administration Tribunal [Parts VII and VIII].

Finally, in this regard, the following respond to some of the issues discussed in the IEA publications:

➢ Debt rules: There are elaborate approvals and accounting requirements in the Constitution, FAA/FAR and the Loans Act 335, including the approvals given by Parliament and reporting in public accounts; the budget also contains annual performance reviews of public debt. As an example, the establishment of on-lending programme and Sinking Fund Accounts are already contained in the FAR. 

➢ Budget balance rules: These are contained in the provisions on Appropriation, which culminate in the passage of an Appropriation Act annually and, where appropriate, the submission of Supplementary Budgets to Parliament.

➢ Expenditure rules: These are the most elaborate in the Constitution and FAA/FAR (Estimates and Appropriation), including provisions on Government Stores as well as the procurement provisions of the Public Procurement Act (Act 663)

• BoG laws and ECOWAS Protocols: The BOG Law includes limits on borrowing from the Central Bank.  Furthermore, ECOWAS single convergence criteria — to which Ghana has subscribed — contains some of the rules that are in the publications. Indeed, it is barely a week since President Mahama visited Niger to discuss the fiscal and monetary rules — as joint chair of the ECOWAS Task Force on the implementation of the rules.

Omissions

The IEA dire debt trajectory also tends to ignore the medium-term prospects for the country and, hence, did not make room for significant GDP growth: The IEA and its experts did not have to go to the 1980s to profile the debt trajectory for the country. Besides the borrowing space provided by HIPC, evidence shows clearly that the rate of growth and base of Ghana’s GDP went up significantly between 2010 and 2012, mainly due to the rebasing of the GDP, fast growth of the services sector, increased construction activity, rebound of cocoa production and exports of crude oil (for the first time). On the other hand, the disruption in gas supply from the WAGPP and fall in commodity (gold, cocoa and now crude oil) prices have had negative impact on GDP in 2013 and 2014.

However, in terms of the trajectory, the 2015 Budget notes that the period from 2015 through 2017/18 will experience further increase in crude oil and, notably, the advent of gas production. These are no longer conjectures but based on well-established programmes such as Jubilee gas (being commercialised since November 2014); as well as ENI-VITOL (Sankofa) and TEN field gas and crude oil production (2016-2018). The agricultural, other industry and services are also estimated to grow as part of the government’s ongoing value addition, diversification, energy mid-to-downstream, exports and local content policies.

Assets debts finance

The discussions also ignore the potential of underlying assets we finance from our public debt: Often the discussions on public debt do not take account of the underlying assets they finance. Examples of such critical projects include:

• 132 megawatts thermal plant [US$194 + 75.8 million]

• Shep 4 for Ashanti and BA regions [US$30 million]

• Bui Dam project [US$151.6 + 292 million]

At this stage, it is necessary to highlight another major initiative to boost exports. During last week, President Mahama inaugurated a task force to establish an EXIM Bank for Ghana. This is another concrete example of the transformational agenda for the government.

The IEA statement and publications ignore various fiscal stabilisers that have become active in a few years only: The most obvious omission is the establishment of the Stabilisation Fund under the Petroleum Revenue Management Act (PRMA, Act 815) and other programmes.

• The Stabilisation Fund had accumulated over US$590 million by the end of December 2014, with over GHc50 million and US$288 million, respectively, being utilised to set up a Contingency Fund [under the Constitution] and Debt Service Account [as noted, to pay down domestic and foreign debts]. 

• Hedging Programme:  IEA ignores the fact that MoF has been implementing a hedging programme for crude oil imports — which is about to be renewed. This has had huge benefits in the management of prices under the “automatic adjustment” for petroleum and utility products and services. 

• The National Petroleum Authority (NPA) also has a price stabilisation margin in the petroleum price build up. The NPA noted, since January 2015, that it has used this account to pay down accumulated arrears of subsidy and foreign exchange losses during the period that crude oil prices had been rising.

• COCOBOD Stabilisation Fund: Finally, in 2008/2009 crop year, the government set up a Stabilisation Fund with annual contributions from FOB price as a risk mitigating mechanism against a fall in international cocoa price to sustain the earnings of cocoa farmers in challenging times. This is part of the annual cocoa pricing program. Last year, as part of the announcement of new producer price, COCOBOD announced that it would add [US$ 24.7 million] to its Stabilisation Fund during the 2014/15 cocoa season. 

Innovative fiscal programmes

Hence, contrary to the IEA statement and publications, the NDC government has been foremost in starting and utilising innovative fiscal programs and stabilizers to protect the economy against the volatilities and accumulation of public debt.

Indeed, the IEA and its experts appear to totally ignore the January 2015 press conference in which the Minister of Finance noted that the nation is likely to drawdown on the Stabilisation Fund for the first time to support the Budget, given the recent sharp decline in crude oil prices. With the recent approval given by Cabinet, this means that Ghana will draw down 50 per cent or about US$286 million of the Stabilisation Account to support the budget against the falling prices. This is the first time all these are happening in the life of the nation.

Conclusion

We disagree with the IEA’s dire projection of a debt/GDP ratio that does not take account of potential rapid GDP growth and the new debt management policy.