IMF cautions govt against new borrowings

The International Monetary Fund (IMF) is convinced that “Ghana is well positioned to honour its debt obligations.”

However, the Breton Wood insitution warned that the current debt levels require that the government “exercises caution” with new borrowings.

In an email response to Graphic Business enquiries about the country’s debt position, the fund’s Resident Representative for Ghana, Ms Natalia A. Koliadina, said the caution was needed to help preserve debts sustainability, reduce borrowing needs and create space for economic growth.

“In order to preserve debt sustainability, the authorities need to limit non-concessional borrowing to finance high priority infrastructure projects, which will add to the economy’s growth potential,” she said.

In what is expected to silence critics about the sustainability of the country’s debt levels, she explained that the fund also supported the government’s effort to refinance existing debt at a lower cost and to smooth debt payment profile.

“Government’s continued fiscal consolidation is important for reducing its financing need. It is important to remain cautious with respect to new borrowing, given that public sector debtto- GDP ratio is still close to 70 per cent of GDP and debt service to tax revenue exceeds 40 per cent,” she said.

Debt trend

Ms Koliadina was responding to questions on the status of the national debt, its servicing cost and recent plans by the government to borrow some US$3.36 billion by December this year.

Since 2014, discussions on the economy have centered more on the debt stock after increased borrowing negatively impacted on other fiscal indices.

From GH¢4.9 billion in 2006, the national debt stock has risen to GH¢122.6 billion in 2016, as the country tried without success to borrow its way out of debt. As of September this year, the debt stock was reported at GH¢138.9 billion, equivalent to 68.9 per cent of total output, measured by gross domestic product (GDP).

New debt ceilings

The strong build up in the debt has created some anxiety among economists and policy think tanks, with many fearing that the country could relapse into the pre-highly indebted poor country (HIPC) and multi-lateral debt relief initiative (MDRI) days, when debt-to-GDP ratio was more than 100 per cent.

Of particular concern is the strong growth in the debt servicing cost: From GH¢393.4 million in 2006, the amount used to repay loans rose to GH¢10.7 billion in 2016 and is now estimated to end 2017 and 2018 at GH¢13.3 billion and GH¢14.9 billion respectively.

In a paper titled ‘Ghana’s growing public debt and its implications for the economy,’ a fiscal policy think tank, the Institute for Fiscal Policy (IFS), said the, “debt service now absorbs a large part of domestic revenue, leaving the country vulnerable to shocks.”

“The country has fallen into a debt trap as real interest rates continue to surpass GDP growth rates, which has forced the country to continue committing more of its tax revenue to service debts,” it added.

To help contain the situation, Ms Koliadina said the IMF’s Executive Board was due to approve a new “ceiling” for non-concessionary and liability management debts.

The ceiling will be contained in a macroeconomic framework and debt sustainability framework (DSF) that would be approved by the IMF Executive Board in the context of the next review, she added.

“Under the extended credit facility (ECF) arrangement, we have been monitoring government’s borrowing for liability management—refinancing existing debt—and non concessional borrowing for priority infrastructure projects. Both ceilings are being discussed in the context of the programme review,” she explained.

Increase revenue collection

She advised that the country improved the efficiency of public investment by strengthening project selection, appraisal and procurement and comprehensive evaluation of borrowing costs to help reduce borrowing needs.

“Domestic revenue mobilisation would open space for budget financing of development projects, while increasing Ghana’s capacity to service debt,” she added.