The study of economic growth focuses on the long-run trend in aggregate output as measured by potential Gross Domestic Product (GDP). Increasing the growth rate of potential GDP is key to raising the level of income, the level of profits, and the living standard of the population.

Economic growth is a sustained expansion of production possibilities measured as the increase in real GDP over a given period. Rapid economic growth maintained over a number of years can transform a poor nation into a rich one. However, some economies mostly in Africa stagnate and become poor because of huge debt burden that poses enormous risks to growth in these countries.

Governments around the world issue debt to help finance their general operations, including current expenses such as wages for government employees, and investments in long-term assets such as infrastructure and education. As countries capital markets develop, an increasing number of sovereigns have been able to issue both external debts (denominated in hard currency, often the U.S. dollar) as well as local debt (issued in the sovereign’s own currency).

Credit rating agencies make a distinction between debts issued in the sovereign’s local currency and debts issued in a foreign currency. In theory, a government can make interest payments and repay the principal by generating cash flows from its unlimited power (in the short run at least) to tax its citizens. Thus, it is common to observe a higher credit rating for sovereign debts issued in local currency than for those issued in a foreign currency. But there are limits to government’s ability to reduce the debt burden. As the sovereign debt crisis that followed the global financial crisis has shown, taxing citizens can only go so far in paying down debt before the taxation becomes an economic burden. Additionally, printing money only serves to weaken a country’s currency relative to other currencies over time.

The Debt-to-GDP ratio measures how a country owes relative to what it produces. As at the end of 2015, Ghana's Debt-to-GDP stood at 72.9%. Clearly the debt trend of the country is deteriorating. Government debt/GDP is rising rapidly. The government is running a budget deficit, and the country is running a sizable current account deficit, which means it must attract funding from outside the country. Interest payments are generally rising, as is the interest rate on new debt.

Anatomy of Ghana debt stock

The government of Ghana in the past few years issued massive amounts of new debt. The ‘’borrow and spend’’ policies of the government increased the total amount of government debt to roughly to US$25.6 billion or GH¢97.2 billion in December 2015, equivalent to 72.9 percent of the year’s total economic output, measured by gross domestic product (GDP). Given that there are about 26 million Ghanaians, the total amount of government debt now exceeds GH¢3,700 for every man, woman, and child in Ghana. With the recent rate of growth in government debt, Ghana is now borrowing more than GH¢50 million a day.

In March 2016, the Ministry of Finance indicated that Ghana’s domestic debt stock rose to GH¢34.6 billion (30.5% of GDP) at the end of 2014, up from GH¢26.7billion (28.4% of GDP) in 2013 while its external debt rose to US$13billion (36.6% of GDP) at the end of 2014, up from US$11.5billion (26.9% of GDP) in 2013. The total public debt increased to GH¢76.1billion (67.1% of GDP) in 2014 from GH¢51.9billion (55.3% of GDP) in 2013. Also, data released by the Bank of Ghana (BOG) (March, 2016) showed that out of the total debt stock at the time, domestic debt amounted to GH¢39.4 billion (29.5 per cent of GDP) while the rest, GH¢57.8 billion (43.4% of GDP), was external debt. That means that in cedi terms, the national debt burden grew by 27.7% between December 2014 when it was GH¢76.1 billion (67.1% of GDP), and December 2015 when it peaked at GH¢97.2 billion. In dollar terms, however, it went up by seven percent from US$23.8billion in 2014 to US$25.6 billion last year. The variation in the movement of the debt in cedi and dollars terms reflects the sharp decline in the value of the former against major trading currencies in 2015.

The International Monetary Fund (IMF) research found that, debt levels for developing countries such as Ghana, ranges from 30% to 60% and that of the advanced economies are higher ranging from 60% to 80%. Within the last 4 years, Ghana’s total debt stock rose to GH¢97.2 billion (72.9% of GDP) as of 2015, up from GH¢24billion (42.2% of GDP) as at the end of 2011. Judging from this, it suggest that government added to the public debt an amount of GH¢73.2 billion between 2011 and 2015 representing a geometric growth rate of 42% per year. The significant increases in Ghana’s government debt pose serious risks to the growth of the country’s economy into middle-income status.

Ghana’s debt-to-GDP ratio, when compared with the likes of Kenya and Cameroon, is quite worrying. At the end of 2015, the Debt-to-GDP ratios were 52.80% for Kenya and 32.16% for Cameroon (International Monetary Fund).  The interest payment as a percentage of revenue is so high; the 2016 budgeted interest payment of GH¢10.49billio is equivalent to 6.6% of GDP which is on the higher side. The interest amount is 57% higher than the amount earmarked for capital expenditure (investments). The interest payment as a percentage of GDP was 2.8% as at 2009, 4.3% as at 2014. According to Fitch Ratings (2015), Ghana’s interest payment burden is the highest amongst its rated Sub-Saharan Africans sovereigns.

The rating body, Fitch recently said, ‘’Fiscal slippage ahead of the November elections would increase financing pressures. A further decline in commodity prices would negatively impact growth and exacerbate Ghana’s twin deficits. The 2016 budget calls for a further narrowing of the deficit to 5.3% of GDP’’. However, Fitch believes that the 5.3% target will be difficult to attain and rather projected a 2016 fiscal deficit of 6.3%.

Despite predicting fiscal slippage ahead of the elections, the ratings agency affirmed Ghana’s long-term foreign and local currency Issuer Default Ratings (IDR) at ‘B’ with a negative Outlook. This rating is below investment grade and considered to be speculative. It also shows that the credit quality of the country is deteriorating and there is a chance of investment loss due to the inability of the Country to make timely interest and principal payments. They further state that Ghana’s fiscal and external deficits leave the country vulnerable to domestic and external shocks, including low oil prices and tight financing conditions. Fitch forecasts that economic growth will increase to 5.4% in 2016 and that public debt will peak this year. "However, downside risks remain’’. Fitch said.

Is the country (Ghana) being sold?

Ghana's external debt is increasingly being issued to foreign investors. In 2013, about 26.9% of Ghana government debt was held by foreigners. By 2015, that figure had risen to more than 43%.

History tells us that foreigners may be unwilling to hold the country’s debt or assets as the debt stock rises to unsustainable level. If that happens, serious problems could be in the offing. What happens if foreign investors panic?

With the dollarization of the country’s economy and with significant size of the total debt belonging to foreigners, slight weakening of the cedi will have dire consequence and ultimately increase the size of the external debt without any corresponding changes in spending or productivity. Similarly, a high debt level is also at risk to high-interest rate, low credit ratings and reduces investors’ confidence in the economy. A rise in interest rate means an increase in funds required to service the debt.

While everybody hopes that the local currency shows its resilience into the future, rapidly growing foreign holdings of government of Ghana debt clearly mean there is less domestic control over our own economic well-being.

 

The writer is the head of Corporate Finance and Research at TTL Capital Limited.

Contact: wencelav.safrega@ttlcapital.com.