Debt overhang cause of poor economic growth — Dr Richmond Atuahene
The country’s poor economic growth is as a result of the debt overhang challenges and until it is addressed, it will remain a drag on economic progress for years to come, a banking expert, Dr Richmond Atuahene, has said.
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He said despite the achievements of the domestic debt exchange programme which saw the government swap bonds worth GH¢82 billion for 12 new ones at reduced coupon rates and longer tenors, it had failed to address debt overhang challenges.
He noted that the country’s stock of debt and its structure continued to pose risks for fiscal sustainability and policy slippages which could put the economy right where it started before the domestic debt restructuring.
In a research paper shared with the Daily Graphic, Dr Atuahene said the country’s debt outlook remained vulnerable to a wide range of issues including fiscal and structural, as well as to the external factors (such as the path of the global recovery after COVID-19).
“Domestic debt exchange did not trigger any meaningful fiscal consolidation beyond the temporary reduction in treasury bill rates.
“Instead, the sense of additional fiscal space created by lower interest bill gave way for more pressures on the public wage front in the recent 25 per cent wage increases for the public sector in 2024, building permanent pressures into the fiscal outlook and weakening the overall/net impact of the exchange in the medium term,” he stated.
Fiscal consolidation
Dr Atuahene said the DDEP must, therefore, be underpinned by strong fiscal consolidation, to be necessary to reverse the adverse fiscal dynamics and reduce the debt overhang and crowding out that had plagued the country for the past decade.
He said these significant efforts to reduce fiscal dominance must be aimed at encouraging private sector investment to catalyse the underlying conditions for robust economic growth.
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“The experiences of many of the countries that have undertaken some form of debt restructuring suggest that the transformation to virtuous cycle of sustained macroeconomic improvement hinged strongly on a substantially improved external environment which will facilitate an export led recovery,” he noted.
All in all, he said there was an urgent need to implement policies that would help restore debt sustainability and investor confidence, as well as safeguard the stability of the financial sector.
He said a multi-year credible fiscal adjustment framework would be required to put the debt ratio on a downward trajectory.
In contrast to consolidation attempts in the past, Dr Atuahene said this effort would have to be underpinned by efforts to substantially strengthen expenditure management.
Efficient use of borrowed funds
He said the findings of the research indicated that the presence of debt overhang and crowding out in the economy could be attributed to the failure to efficiently use the borrowed funds on productive yielding activities.
He said the findings also suggested that the domestic debt restructuring had hampered economic growth through the debt overhang effect and the crowding out effect. He added that heavy public debt service obligations resulted in a large risk premium on interest rates, periodic bouts of financial market instability, and a crowding out of bank credit to the private sector, all of which had contributed to a very low potential growth rate.
“One negative effect of domestic debt restructuring is that it has caused investors to lose confidence in the country's ability to repay its debt on time. This has led to a decrease in domestic investment and an increase in the cost of borrowing for the government and local businesses.
“The decreased domestic investment has a ripple effect on the local economy. As businesses, including SMEs, have struggled to access the funds they need to grow and hire workers, the unemployment rate in Ghana has dramatically increased,” he stated.
He said the lack of investment had also led to an increase in the cost of borrowing for the government and local businesses, making it more difficult for them to finance their operations and invest in growth.
Under investment in energy sector
He said the findings also confirmed that debt overhang had led to under-investment in the Ghanaian energy sector.
“For example, most of the firms in the energy sector are in financial distress and find it difficult to pay off their suppliers or raise funds for new investments because the proceeds from these new investments mostly serve to increase the value of the existing debt instead of new investment.
“Debt overhang has caused under-investment problems in the energy sector that could impact negatively on future production and supply of electricity to the entire country,” he stated.
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