Auditing and management firm, Deloitte Ghana is warning that the country’s rising external debt will lead to increased demand for foreign currency for debt repayment and further depreciation of the cedi.

This may also lead to further strain on the government’s finances as it will need to raise more cedi revenue to repay the external debt.

In its critique of the 2022 Mid-Year Budget Review, it said the downgrading of Ghana’s credit rating by Fitch and Moody’s has adversely affected the government with Ghana Eurobonds currently trading at distressed debt levels, which has led to increased and prohibitive Eurobond borrowing costs.

“A comprehensive debt management strategy, with a focus on accessing concessionary loan facilities and reducing our reliance on commercial loans should be pursued by government”, it stressed.

Data from the Bank of Ghana puts Ghana’s debt at ¢393.4 billion, about 78.3% of Gross Domestic Product as of the end of June 2022.

Out of this, ¢203.4 billion ($28.1 billion) is external debt.

The total debt issuance by the Government increased by 17.6%, from June 2021 to June 2022 compared to a 29.5% increase in total debt issuance between June 2020 and June 2021. This increased debt issuance in combination with elevated global inflation in 2022 has led to increased borrowing costs for the government in both the domestic market and international markets.

In the international markets, issuance of debt and payment of interest has become more expensive due to investor fears over the government’s fiscal position and the depreciation of the Ghana cedi against foreign currencies. Consequently, the government has not been able to issue sovereign bonds in 2022 due to these adverse market conditions.

Increased domestic debt crowds out private sector

Deloitte said the increased domestic debt issuance highlights the existing competition between government and businesses for funds available in the domestic market.

“Given the lower risks involved in lending to the government versus the private sector, this has resulted in increased lending to government since the beginning of 2022 at the expense of the private sector. This ‘crowding out’ of funds available to the private sector results in increased borrowing costs for private sector businesses due to their higher default risk, which ultimately also increases the likelihood of private businesses defaulting on their loans in the medium to long-term”, it pointed out.

“The government should focus on containing inflation and stabilising the exchange rate to help reduce the default risks in the private sector and incentivize commercial banks to increase private sector lending”, it stressed.

Revised interest expenditure due to cedi depreciation

It also said that the revised interest expenditure of ¢41,632m in 2022 (30% of 2022 total expenditure) is due to the cedi depreciation against foreign currencies and increased interest rates due to higher global inflation.

Further depreciation against foreign currencies, it said, may lead to increased interest expenditure on external debt and a subsequent increase in the budget deficit.