The pursuit of effectively allocating scarce resources among people brings about the need to economise by the use of vehicles like theories, and concepts.

We additionally must have ways of measuring the efficacy of those concepts with econometrics. 

One of those metrics is the DEBT-TO-GDP ratio. It measures a country's level of leverage relative to its productivity level. It is the ratio of the total public debt of a country or an economy over its total value of goods and services it produces within a specific period of time (yearly).  Simply put, it compares what a country owes to what it produces. 

I posit that this measurement tool have been overhyped in this country for a very long time. What it stands for and how we actually interpret it is asymmetric, and incongruous to what it ought to be. A more potent measuring tool exists, and should be our subject of analysis frequently: the Tax to GDP Ratio.

Tax to GDP ratio has a far reaching fortune and a wider implication for economies. It measures how well a government controls a country's economic resources. It is the share of a country's output that is collected by government through taxes. What is the total revenue we have been able to generate or collect, emanating from our GDP level. 

On the otherhand, debt to GDP ratio of an economy simply assesses and projects a particular country's ability to pay back its debt, or otherwise. 

In accounting parlance, it is nearly consistent to a firm's debt to equity ratio. 

A high Debt to GDP ratio does not necessarily mean a weak economy, or an economy that is on the verge of collapse. 

It can be so but not necessarily so. It can be so because when government expenditure from borrowings are not appropriated into revenue generating platforms, the implication is that the economy's credit risk or risk of default increases, and it will find itself in a borrowing cycle which will eventually lead to an economic crisis. Can I say like this government finds itself in?

It is also not necessarily so because when debt is invested into fluid ventures capable of generating sufficient cash flows, like performing factories, expanding existing hospitals, or building new hospitals(but loan or debt tenure must be well structured for new capital intensive projects).

It is mainly (not absolutely his) the business of the Creditor to be concerned with our Debt to Gdp. He needs to assess the extent to which our economy (GDP) can soak a particular level of debt.

If your Debt to GDP is high, the probability of your debt being delinquent is high, all other things being equal. Therefore, if he actually intends to fund you, that notwithstanding, he will have to create a space for the receipt of his repayment. That is exactly what the IMF has done; restructure your debts so that when I grant you the $3bn facility there will be space for the receipt of my repayments till maturity.

Therefore, our discussion s on Debt to GDP ratio should be majorly constricted to Debt, Debt management and the effective appropriation or disbursement of same.

Ghana's Debt to GDP ratio as I write is nearly 100%. But one of the Euro Convergence criteria was that government debt to GDP should be below 60%. This is not cast in stone either... Economy focus could determine what will be ideal. BoG January 2023 Economic and Financial data summary revealed that Ghana's debt stock increased by ¢108.3 billion between September and November 2023. 

This ordinarily should not have been a problem. But as it stands now, it is dangerous because the monies borrowed have not been used well. That of USA stood at 134.8% in Quartey 4 of 2022, Singapore's Debt to GDP is about 163%. Japan's is the highest standing at 262.5% as of 2021.

We consistently appeal to some of these economies as benchmarks. But singapore's level is intentional. They decided to place focus on investment and infrastructure. It was on purpose. So the level cannot be described as bad. 

I argue that this government is without doubt a very bad manager of our economy because it borrows without aim, and care. It is clueless, and strategically weak.

But let press more on how much revenue we are able to generate as a country from our various levels of GDP (Tax Revenue to Gdp ratio), and assess governments on this metric. We will then be able to push for Revenue collection effeciency and what it is used for. In other words, what values have been created from the revenues we generate. We should place focus on values created from what is collected. Ghana's tax to GDP stood at 15.6% as at the end of 2022. Surprisingly, this is higher than the 12% recommended by the IMF to ensure accelerated economic growth; but below the 33% mean for OECDs. 

However, why is our economy suffering notwithstanding the positive variance of 3.6% we recorded in 2022 against the IMF recommended level of 12%?

I guess, it's corruption. Corruption has swallowed a chunk of the revenue we generate to the extent that we feel we are not generating enough revenue.

Government in borrowing also competes with private lenders (banks and non bank financial institutions). When governments borrow at high interest rates from the public, the banks are also forced to offer higher rates to borrowers from the same public. The implication is that cost of capital increases.

For most borrowers, demand for loan has inelastic demand, and nearly perfectly inelastic demand. Without a loan facility the business halts. Therefore, irrespective of the high cost of capital, they will still borrow and pass it to the consumer, hence inflation.

The BoG in an attempt to curb inflation also usually increases the reference rate to deter businesses from borrowing. But no negative correlation has been established so far in this economy, between an increase in reference rate as an independent variable and loan portfolios as a dependent variable. It rather worsens the interaction between the two. 

Am I talking too much? 

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DISCLAIMER: The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.