[ 2021-02-10 ]

Public debt, Ofori-Atta and the records in the midst of complex challenges
The announcement by the Monetary Policy Committee
(MPC) of the Bank of Ghana (BoG) that the public
debt stock as at the end of November 2020 has
risen to GH¢286.9 billion is once again the
subject of public debate about prudent management
of the public debt stock.

The figure represents 74.4% of Ghana’s Gross
Domestic Product (GDP).

The sustainability of the debt, how Ken Ofori-Atta
managed it in the last four years compared to the
situation before the New Patriotic Party (NPP)
assumed office is sharply in focus.

Oftentimes, public debt arises when government
spending is more than its revenue and therefore
borrows either domestically and/or externally to
close the gap.

Government budgets capture their spending plans
against expected revenue on yearly basis and at
all times account for legacy debts of past
governments too.

As a result, a previous government legacy debts
must always be carried on by a new government as
arrears – which is well captured by the adage
Government is a continuum.

Substantial arrears NPP government inherited
It is this practice that bequeaths to President
Akufo-Addo substantial arrears owed to contractors
and other government service providers in excess
of GH?11 billion of which auditor general
validated only GH?6 billion, energy sector pay or
take contract commitments of over GH?6 billion a
year, and a financial sector toxic assets valued
at over GH?21billion.

Also, the past government was on record to have
borrowed heavily at the short-term end of the
treasury market at average interest above 20%.

This was the state of finances that the
Akufo-Addo-led government successfully turnaround
in the past four years as affirmed by available
development indicators.

It was within this difficult context that the
success of Mr Ofori-Atta’s stewardship in
containing the public debt and passing a Fiscal
Responsibility Act and Financial Stabilisation Act
must be analysed.

GH¢286.9bn public debt stock as at Nov. 2020
The public debt stock as at the end of November
2020 stood at GH¢286.9 billion, representing
74.4% of Ghana’s Gross Domestic Product (GDP) as
against GH¢122.6 billion at the end of 2016.

Public debt more than tripled between 2012 and
2016
Looking back, between 2012 and 2016, the total
public debt stock more than tripled from GH?36
billion ($8.6bn) to GH?122.6 billion ($29.3bn),
representing a cumulative rise of 24.7% of GDP
over the period (from 47.8% to 72.5%).

This meant that on a weekly basis, about GH?1
billion of already contracted domestic debt was
maturing for Akufo-Addo-led NPP to look for funds
to settle.

In fact, that meant about GH?4 billion of domestic
debt matured per month at a time when the
country’s tax revenue per month was just about
an average of GH?2.2 billion.

World Bank Partial Risk Guarantee in 2015
The situation was so bad that for the first time
in sub-Saharan Africa, Ghana obtained a World Bank
Partial Risk Guarantee (PRG) to issue the Eurobond
in 2015, mainly to refinance short-term domestic
debt.

In plain language, the touted expertise of the New
Patriotic Party (NPP) government was needed to
effectively deal with the problem of refinancing
debts anytime they were due.

The total projected fiscal expenditure for 2016
was GH?43.9 billion, representing 26% of the GDP;
but it rather exceeded the target spending of
GH?50.3 billion, representing 30.2% of GDP.

A report, jointly published by seven organisations
that constitute Jubilee Debt Campaign in 2016,
revealed that Ghana was in a debt crisis because
the country was losing around 30% of government
revenue in external debt payments each year.

It attributed the situation to a combination of
the fall in the price of commodities and the rapid
pace at which loans were contracted and not being
used well enough to ensure they could be repaid.

The authors said such huge payments were due to
Ghana having borrowed more loans from
institutions, such as the International Monetary
Fund (IMF), which were used to pay mainly interest
on debts that also caused the country’s debt
stock to balloon in size.

To the Jubilee Debt Campaign report, the situation
was expected to stay well above 20% of revenue
until, at least, 2035.

Debt re-profiling agenda: 15-year bond issued in
April
Faced with this situation upon assumption of
office by the Nana Akufo-Addo-led NPP government,
Mr Ofori-Atta announced a debt re-profiling agenda
and Ghana issued the first 15-year bond in April
and also issued a second seven-year bond.

Provisional interest savings arising from
government’s implementation of the liability
management programme by re-profiling domestic debt
was estimated at GH?612 million for 2017.

This re-profiling ensured that Ghana’s debt
stock was innovatively added on yearly basis at
rather lowered rate of debt accumulation.

The interest paid on Ghana’s debt was over GH?14
billion in 2016 when the National Democratic
Congress (NDC) government exited power.

Between 2017 and 2020, Ghana has paid over GH?80
billion as interest on the public debt stock.

GHc14.9bn interest cost paid in 2017
Interest cost on these debts had increased from
GH?9.6 billion in 2015 to GHc14.9 billion in
2017.

The public debt stock as at the end of 2018 hit
GH?173.2 billion or $35.92 billion.

In 2018, of the GH?37.8 billion raised in tax
revenues, GH?21.1 billion was used to service
interest payments alone.

This means that Ghana was spending close to 55% of
tax revenue to service interests on past loans
alone.

GH?19.756bn interest cost paid in 2019
In 2019, interest payments cost the nation about
GH?19.756 billion on loans borrowed.

For the year 2020, Ghana was expected to pay about
GH?24 billion as interest on the public debt
stock.

Data shows that Ghana’s revenues are consumed by
wages and salaries, interest payments on
amortisation and statutory payments, thus
accounting for 99.6% of all government revenues.

Over the past four years, the government worked
hard to grow the economy from the 3.4% growth rate
it inherited to 6.4% growth rate before the
incidence of COVID-19 in March 2020.

The strategy was to move Ghana beyond aid and
improve on the living standards of all Ghanaians.

An asset quality review carried out by Bank of
Ghana (BoG) in 2015 and 2016 revealed severe
challenges with solvency, liquidity and asset
quality in Ghana’s banking industry, with some
banks obviously in serious difficulties to meet
demands of customers.

Regulatory crackdown on banking industry
To address the situation and save the economy, a
regulatory crackdown on poor business practices
and weak capital positions in Ghana’s financial
sector resulted in a series of market exits at the
time.

Though this came at a high price, this necessary
act has, however, made Ghana’s financial sector
now more robust and sustainable with strong
corporate governance structures.

Indeed, Mr Ofori-Atta had to borrow GH?21.6
billion to pay for the banking sector clean-up,
created a financial architecture conducive for
growth and protected 4.6 million depositors and
81,700 investors. This obviously has added to
Ghana’s debt stock.

In the four years of governance, the NPP
government also paid some GH¢12 billion in excess
energy capacity charges inherited in 2017, and has
kept the lights on.

It also has settled substantial part of the GH¢11
billion outstanding arrears bequeathed to it.

Simply, with Ghana’s tight fiscal space, coupled
with budget rigidities, Mr Ofori-Atta, on
assumption of office as Finance Minister in 2017,
had to look for resources to pay for legacy debts
and their associated high-interest payments in
addition to finding additional funds to execute
government’s bold plans of Free Senior School
(Free SHS), agricultural modernisation programmes
such as Planting for Food and Jobs (PFJ), Rearing
for Food and Jobs (RFJ), Planting for Export and
Rural Development (PERD), One District, One
Factory (1D1F), Nation Builders Corps (NABCO),
among others.

Presenting expenditure on appropriation for
January 1, 2020, to March 31, 2021 to Parliament,
Mr Ofori-Atta announced that government has
invested in excess of GH¢15.7 billion into its
key flagship programmes.

“These flagship programmes, he said, are meant
to lead to real economic transformation;
strengthen human capital through enhancing access
to healthcare, education and skills development,
modernize agriculture and industry, deliver
infrastructure across the country – including a
revitalised railway sub-sector – and create
decent jobs for the teaming unemployed youth and
graduates.

Stabilisation of the Ghanaian cedi
Mr Ofori-Atta-led finance ministry’s ability to
have better managed the country’s debt is
evident in the stabilisation of the Ghanaian cedi
against major trading currencies over the past
four years.

It is also evident in the favourable credit
ratings from Fitch and Moody’s and increase
investor confidence in the economy due to increase
in FDI inflows over the period.

In fact, the relative stability of the cedi alone
helped save Ghana’s purse by limiting rates of
exchange on interest charges on
foreign-denominated loans.

With higher expectations to bring the debt under
control, COVID-19 emerged.

Analysts attribute the increasing cost of
servicing the national debt in recent times to the
shock occasioned by the coronavirus disease
(COVID-19), which has caused revenues to fall
substantially.

2021 Growth rate projected around 4%
From 0.9% growth rate as at end December of 2020,
the country’s growth rate has been projected to
be around 4% in 2021. This outlook further
suggests the future looks bright in managing the
nation’s public debt and the economy in general.
The story can’t be told if it is not expressly
stated that had it not been the government’s
ability to have sustain debts levels, just like
other nations, Ghana too would have been on its
knees following the incidence of COVID-19.

The debt service cost, which refers to the payment
of due portions of loans (amortisation) and the
interest, remained high, resulting in a higher
ratio when debt service cost was compared with
total revenue.

The Ministry of Finance rolled out a number of
solutions to help reverse the trend and reduce its
impact on the economy.

The measures include the use of low-cost debts to
retire comparatively costly ones, the development
of a robust domestic debt market to create space
for low-cost debts.

It should also include an increased resort to
bilateral and multilateral sources for loans
without compromising on ensuring prudent level of
risk.

COVID-19’s temporary reduction in revenue is a
one-off increased expenditure to save lives and
livelihoods and a temporary reduction in GDP.

GH¢100 billion CARES programme
The prospect for ensuring debt sustainability is
well accounted for in the GH¢100 billion Ghana
Coronavirus Alleviation & Revitalisation of
Enterprises Support (CARES) programme.

The need to better the lot of citizens through
government expenditure in the midst of dwindling
revenues means government has to borrow and use
the money well for the development of the
country.

However, scarcity of resources and reduced
financial capacity require the mobilisation of
resources from all sources, including borrowing.

Though the debt stock seem to be on the rise, the
fact still remains that had it not been the shock
of COVID-19, the NPP government, from all
indications and available economic figures, is
seen to have better manage the country’s debt
better.

What is the definition of Public Debt?
1. All over the world, a country’s public debt
stock indicates how much the country owes in its
local currency. By local currency, then exchange
rate can affect the definition.

2. Usually, public debt usually relates to
national debt. However, some countries include
other state governments and State-Owned
Enterprises (SOEs).

3. In Ghana, the public debt refers to Central
Government and the guarantees that Central
Government gives to SOEs.

4. Public debt simply occurs as an accumulation of
budget deficits. Budget deficits affect the debt
stock and the debt stock also affect the budget
deficit.

5. If public debt is an accumulation of budget
deficits, then Public Debt may not always be a bad
thing.

6. Public debt is good when in the short run,
Government gets extra funding to fund projects and
other investments for the necessary increased
welfare and economic development as stated in
Article 36 of the 1992 Constitution.

By this, the public debt allowed the NPP
Government to support its flagship projects for
roads, agriculture, health, railway, education and
energy.

Domestic bonds are also considered as the safest
investment for investors in Ghana and abroad.

This, also develops what the economists call the
domestic bond market.

Thus, when utilized correctly, it provides
adequate funding in the short run and should also
provide long term capabilities to repay the
loans.

7. Applying this to Ghana, Mr Ofori-Atta was able
to promote the passage of the Fiscal
Responsibility Law, the first of its kind in
Ghana’s finance laws to restrict the budget
deficit to 5% of GDP.

Considering his stewardship, the budget deficit as
a percent of GDP was 4.8%, 3.9% and 4.8% for the
period 2017 to 2019 respectively.

8. The COVID-19 effect which reduced revenues and
GDP but increased expenditures increased the
projected deficit to 11.4%.
This is what led to the Debt to GDP ratio of 74.4%
as at November 2020.

As can be seen, the debt figures in 2020 are at
short run high levels.

With the CARES programme being implemented, early
signs of economic recovery is in the horizon.

9. Revenues are indicating early signs of receiver
based on November 2020 numbers.
GDP for first 3 quarters may lead to higher growth
than the original 0.9% for 2020.

Already, the international institutions are
indicating that Ghana could grow at above 4% for
2021.

Comparing this to the NDC period, one can see that
although the debt to GDP ratio has increased, it
is based on reasons that one can call external
health related shock that has hit the whole
world.

10. The IMF in its latest updates on global public
debt estimates end 2020 to reach 98 % of GDP,
compared to their earlier projection excluding
COVID-19 in 2019 of 84 % of GDP.
When public debt is bad

11. Public debt is bad when the level of debt
reaches a point where investors demand for
increased interest rates because they are afraid
that the Government could default.
The demand for increased interest rate is a
measure of default risk.

Although sometimes, this may not always be the
reason for increased interest rates, but this has
been a good guide for analysis.

12. Applying this into Ghana, Ofori-Atta has been
able to ensure that the 91 day TBill rate which is
a leading economic measure in this instance, was
reduced to between 13.3% and 14.7% for the 4 year
running of his stewardship.

This compares to the NDC period of above 20%,
indicating that the debt levels of today are
better viewed by investors than before.

13. There are also a number of factors that added
up to Ghana’s public since 2017 and one of them
was a legacy from the NDC period.

14. The Financial Sector bailout of about GH?21
billion which on its own is about 5% of GDP is
part of the debt stock.

15. The legacy of arrears which could be in the
region of about 3% of GDP is also part of the Debt
Stock.

16. The energy sector bailout which represents
about $1 billion per annum and almost 2% of GDP is
also part of the debt stock.

17. Despite all of these additions, Mr Ofori-Atta
had to be innovative, by re-profiling the debt to
reduce the cost and risk in the debt stock
itself.

He had to redirect expenditures under the
OBAATANPA budget and CARES programme to ensure
that the economic indicators are strong enough to
reduce debt in the short run.

Source - The Finder

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