A record fiscal deficit pushes public debt above the sustainability threshold

Business news for Wednesday, November 25, 2020

Source: Goldstree business

2020-11-25

Ghana’s public debt has exceeded the generally accepted sustainability threshold of 70 percent of the Gross Domestic Product, the total debt of ¢ 273.8 billion at the end of September translates to 71.0 percent of GDP.

This is higher than GH ¢ 209.1 million a year earlier, at which time the debt / GDP ratio at 59.8 percent was still within the sustainability threshold.

The sharp increase in public debt in 2020, which increased by ¢ 55.6 billion GH ¢ during the first nine months of this year, is mainly due to the cost of successfully navigating the outbreak and viral spread of the COVID-19 pandemic .

During that period, government revenue was limited to 9.4 percent of GDP, while its expenditures rose to 18.4 percent of GDP due to the inevitable increases in costs related to health, social interventions to protect the population of the adverse effects of the public policy responses introduced in slowing the spread of the pandemic and spending on trade stimuli to prevent the economy from falling into recession.

This left the government with a fiscal deficit of 9.0 percent of GDP for the first nine months of 2020, as it struggles to keep the full-year deficit within the revised target of 11.8 percent.

This will be a difficult task, as public spending during the last quarter of the year is being inflated by the real cost of holding general elections and the more dubious cost of accommodating the demands of various interest groups within the electorate.

The most significant group has been that of depositors and investors affected by the closure of financial intermediation companies and fund management companies as part of the recent reforms in the financial services sector.

In fact, the financial resolution bonds used to finance the rescue of its funds had amounted to 15.4 billion at the end of September, up from ¢ 10.6 billion for GH at the end of 2016.

The (near) cash payment of more than GH ¢ 3 billion in bank deposits originally planned to be redeemed over five years and the rescue of funds under management, including those locked in fund managers of uncertain legal status, will carry that figure. at least to GH ¢ 20 billion before the end of the year.

But the reforms have not had a commensurate effect on the size of the fiscal deficit because the government has chosen to treat them as one-off expenditures, below the line. Only the resolution bonds issued during the first three quarters of 2920 would have added one percent of GDP to the fiscal deficit.

However, some public policy analysts are criticizing recent spending on reimbursements to depositors and investors for being simply motivated by elections, even as the government hides behind the social welfare needs of the population due to COVID-19 to excuse its excessive fiscal deficit.

The good news, however, is that the unprecedented fiscal deficit is not driving a major rise in inflation nor is it driving the cedi down. After depreciating 12.9 percent against the US dollar in 2019, the cedi has only fallen 3.1 percent so far this year.

Inflation is kept low; Although it rose well above the Bank of Ghana’s target band of 6-10 per cent since the second quarter of this year, it has since fallen lower, to 10.1 per cent in October.

This is unusual for such a high fiscal deficit, although central bank governor Dr. Ernest Addison explains that it is because the Ghanaian economy has been operating well below its inherent capacity since COVID-19 halted activities. economic.

In turn, this, together with innovative ways of financing the domestic deficit, has also limited interest rates, despite the extraordinary demand for government credit this year.

Short- and medium-term treasury instruments of all terms have seen their interest rates fall since the beginning of this year. 91-day invoices from 15.20 percent to 13.55 percent; Invoices for 182 days from 14.69 to 14.05; 364 days from 17.88 to 16.99; two years from 20.95 to 18.50; and three years from 7:30 p.m. to 7:00 p.m.

Most of the longer-term rates and returns in the secondary market have risen, but this is deliberate to keep the interest of foreign portfolio investors buying a significant proportion of these instruments.

Most importantly, Ghana’s benchmark rate has fallen from 16.11 percent at the end of last year to 14.75 percent in October, allowing for a drop in average interest rates on loans from 23 , 59 percent to 21.26 percent.