THE IMPLICATIONS OF GHANA'S DEBT
Ghana’s total debt is one of the main macroeconomic indicators, which forms the country’s image in international markets. It is one of the inward foreign direct investment flow determinants. Moreover, since these governments borrow mainly by issuing securities, their term, interest rates and overall costs of debt financing, have significant impact on the economy, future of enterprises and social welfare for not only present, but also for future generations. Higher taxes result in lower present consumption, which may mean a slowdown of economic growth. Our debt can also serve as means of delaying taxation, that way reducing current distortions. Thus, the government has two choices for covering its financial needs (budget deficit). The first one implies that the government raises funds through the taxation systems. The second one is that the government can borrow money on the local and international markets. However, debt-financing puts pressure on future generations and their ability to maintain economic and financial stability. They do not only have to repay the amount borrowed, but also cover the costs related to debt financing, which includes interest and costs of debt management. Such a debt is sustainable if it is used exclusively to generate economic growth and its benefits are higher than the initial costs, otherwise serious public finance issues are about to appear. Considering these two factors, the government has to maintain the equilibrium between taxation and debt financing in order to maintain economic and financial stability in the long run.
Borrowed resources should be used productively and efficiently to increase the capacity to service debt through accretion to government resources. A misuse of resources may easily lead to a build-up of debt to unsustainable levels, which has been a major impediment to growth in developing economies including Ghana. The analysis of the nation’s debt has traditionally focused on external debt. We often focus on external debt for two reasons. First, while external borrowing can increase the country’s access to foreign currency resources, domestic borrowing only transfer resources within the country. Hence, only external debt generates a “transfer” problem. Second, since Bank of Ghana cannot print hard currencies necessary to repay external debt, external borrowing is usually associated with vulnerabilities that may lead to debt crises. In almost all of Sub-Saharan Africa, there is a high degree of indebtedness, high unemployment, absolute poverty and poor economic performance despite a previous culture of massive foreign aid. Unfortunately, with fiscal problems and the change in political focus by the donor community, the foreign aid taps seem to be running dry, posing serious economic and social ramifications. This necessitated the Ghana’s sudden shift to the accolade, “Ghana Without Aid”. Therefore, this has made Ghana’s debt one of the major economic policy issues that confronts the government. In recent years, several developing countries adopted aggressive policies aimed at retiring external debt and substituting it with domestically issued debt but hardly has it materialised.
Ghana’s debt refers to the total of the entire nation's debts, which covers debts of the Ministries, Departments and Agencies (MDAs), not forgetting Metropolitan, Municipal and District Assemblies (MMDAs) indicating how much public spending is financed by borrowing instead of taxation. This debt is one method of financing government operations, though not the only method as government can also create money to monetise its debts, thereby removing the need to pay interest. Nevertheless, this practice simply reduces government interest costs rather than truly cancelling government debts and that can result in inflation if used unsparingly. Government debt is created through various instruments including bonds, treasury bills, borrowing from commercial banks and overdraft from Bank of Ghana. It is noted that a fundamental factor causing debt to rise is the over-reliance on external borrowings to complement capital formation in the domestic economy. The higher the interest payment and the heavier the deficit on the government’s current account, the heavier the debt burden. Debt sourced finance represents funds with fixed contractual obligations, which will require pledging future resources of the nation as collateral. In order to cope adequately in the end with servicing requirement, the nation’s debt service capacity must grow at a rate higher than that of its financial risk exposure. The non-debt resources on the other hand represent funds flow without fixed or compulsory obligations on the government. The magnitude and regularity of such resources however, depend on foreign investors’ perception of the investment environment in the recipient country.
The link between Ghana’s debt and economic growth could be driven by the fact that it is low economic growth that leads to high levels of debt. While there is evidence that this debt is negatively correlated with economic growth, correlation does not necessarily imply causality. Studies have shown that the relationship between Ghana’s debt and its economic growth allows for a gradual change in the estimated relationship amongst them. There is a complex non-linearity between these two variables using a set of exogenous thresholds.
According to Bank of Ghana’s summary of Economic and Financial Data of May 2019, Ghana’s total public debt is now USD38.9 billion (Ghc198 billion) as of March 2019. This debt represents 57.5% of Ghana’s GDP. Meanwhile this debt stood at USD35.7 billion (Ghc180.7 billion) as of January 2019, representing 51.3% of GDP. In Ghana, the Minister of Finance is mandated to borrow on behalf of the government from the domestic market through issuance of treasury bills and bonds. The government’s overdraft at Bank of Ghana is the only aspect of domestic debt borrowing that may seem to be limited by regulations. Domestic borrowing through treasury bills and bonds does not seem to have a limit in law. This is different from external borrowing where there is a limit as to how much can be borrowed. Despite the lack of legal limit on domestic borrowing, the Minister of Finance is required by law to report to Parliament in writing, the amount of indebtedness outstanding at the end of each financial year in respect of each manner of borrowing. The details of Ghana’s debt burden continue to be disheartening, for a country embedded with numerous challenges. Some of these borrowings mature and if they are not rolled over, the government has to borrow to pay off these matured loans. The challenge is to succeed in creating a dynamic economy which is able to compete regionally and internationally, increase real GDP growth by more than the increase in population, reduce dependence on external transfers, reduce poverty and unemployment and finally, to reduce the external debts overhang. This is why current economic policies are committed to the principle of economic liberalisation, which includes; export promotion, private sector development, foreign direct promotion, privatisation, and infrastructure.
High levels of Ghana’s debt are negatively correlated with its economic growth, but that there is no link between debt and growth. Many commentators and policymakers did give a causal interpretation to their findings and use the debt-growth link as an argument in support of fiscal consolidation. In general, the Ghanaian economy is the physical subsystem of the country made up of stock of population and wealth, and the flow of production and consumption. It is also defined as an increase in the capacity of the economy to produce goods and services, compared from one period of time to another. Ghana’s debt has a linkage with its growth. Whenever analysts mention economic growth they refer to the growth of that thing we all call the economy. In a different tangent, economic growth is defined as an increase in the production and consumption of goods and services. It refers primarily to national economies and usually it is measured in terms of Gross Domestic Product (GDP) or Gross National Product (GNP). Gross National Product is sometimes used as an alternative measure to Gross Domestic Product. Some analysts argue that GDP is the sum total of goods and services produced in the country by both the nationals and non-nationals for a period of time, usually one year. Regarding the GNP, they emphasise that it takes away the element of the non-nationals from the GDP. Investment is the most fundamental determinant of economic growth identified by both neo-classical and endogenous growth determinants. This economic growth can either be positive or negative. While positive economic growth can be explained by the expansion of the economy, negative economic growth can be explained by the shrinking of the economy. In addition, negative growth is associated with economic recession and economic depression. In order to compare multiple countries, the statistics may be quoted in a single currency, based on either prevailing exchange rates or purchasing power parity. Then, in order to compare countries of different population sizes, the per capita figure is quoted. To compensate for changes in the value of money (inflation or deflation) the GDP or GNP is usually given in real - or inflation adjusted - terms rather than the actual money figure compiled in a given year, which is called the nominal or current figure.
Openness to trade is another potential determinant of economic growth. Trade openness enables exploitation of comparative advantage, technology transfer and diffusion of knowledge, increasing scale of economies and exposure to competition. Although the relationship between trade openness and economic growth is one of the oldest issues in economics, the existing theory does not provide a conclusive answer. Therefore, the openness-growth relationship is basically an empirical question and has been extensively investigated by empirical cross country work dating back to the 70s and the 80s. This issue especially attracted renewed interest since the early 90s, with almost all studies finding a strong and statistically significant positive relationship between trade openness and economic growth. However, the cross-country growth literature is still far from settled since the findings of this literature have been subject to an important criticism in terms of robustness.
Furthermore, enhanced capital, labour and technological progress are the three principal sources of the economic growth of nations. Innovation research and development bears most directly on technological changes and is the key driver for organisations and nations. For this reason most distinguished theorists draw attention to the concept of technological progress and its significant effects upon economic growth. The creation, dissemination and application of knowledge increasingly constitute a major engine of economic expansion. It is established that technology has been “the real force behind perpetually rising standards of living”. Innovation, Research and Development activities can play a major role in economic progress increasing productivity and growth. This is due to increasing use of technology that enables introduction of new superior products and processes.
To conclude, government borrowing from both the local and international markets is inevitable and not reprehensible phenomenon of economic growth. It is a way to stimulate economic growth by injecting money from foreign investors (external debt) into the country as well as distributing assets (internal debt) among those who have more than they can use at the moment and those who lack assets for developing economic initiative or other needs. Since government bonds, treasury bills and loans to the government are considered to be one of the safest financial instruments, the interest rate is much lower than, in the case of public borrowing. This is beneficial to the economy and generates additional surplus if the nation’s debt stream is being controlled efficiently. Ghana’s debt is one of the main macroeconomic indicators, which forms the country’s image in the international markets. It is one of the inward foreign direct investment flow determinants, therefore the government must borrow judiciously. In a situation where the country’s debt is more than half of its GDP, this could stifle and asphyxiate real economic growth.
By Julius Opuni Asamoah (BSc MBA CA)
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