Ghana’s public debt exceeds the sustainability threshold

Business news for Monday, November 23, 2020

Source: Goldstree business

2020-11-23

As widely expected, Ghana’s public debt has exceeded the generally accepted sustainability threshold of 70 percent of Gross Domestic Product, 273.8 billion GHc in total debt at the end of September, which translates to 71.0 percent. percent of GDP. This is up from 209.1 million GHc a year earlier, at which point the debt-to-GDP ratio at 59.8 percent was still within the sustainability threshold.

The sharp rise in public debt in 2020, which rose by 55.6 billion GHc during the first nine months of this year alone, is primarily 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 annual 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 GHc at the end of 2016. The (almost) cash payment of more than 3.0 billion of GHc in bank deposits. It was originally planned to repay in five years and the bailout of managed funds, including those locked in fund managers of uncertain legal status, will bring that figure to at least 20 billion GHc before the end of this 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-time 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 as simply motivated by elections, even as the government hides behind the social welfare needs of the population due to COVID 19 to excuse their 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 a remains under the cap; Although it rose well above the Bank of Ghana’s target band of six to 10 percent since the second quarter of this year, it has since fallen lower, to 10.1 percent 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, along with innovative ways of financing the domestic deficit, has also kept interest rates in check, 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 rates and longer-term returns in the secondary market have increased, but this is deliberate to maintain the interest of foreign portfolio investors who purchase 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.

Inevitably, the monetary easing of the BoG and fiscal stimulus spending by the government itself have combined to give a boost to overall liquidity. Year-on-year growth in total liquidity had risen to 30 percent in October, down from 21.7 percent at the beginning of the year. Importantly, the growth of net domestic assets has accelerated to 36.1 percent from 15 percent at the end of last year, while the growth of net foreign assets has slowed from 51.7 percent to 6.0 percent.

But the data also shows a worrying trend in which money is being pulled out of the banking system. Currency growth outside of banks rose to 44 percent in October, more than double the 20.2 percent growth recorded in December last year. This is interpreted as a flight to safety by households who want to guarantee easy access to their money even during the most draconian closures.

The external sector that sustains Ghana’s economic resilience under the attack of COVID 19 has been the one that has provided the cedi with its stability and therefore stable cedi-denominated domestic prices as well. In October, Ghana had gross international reserves of US $ 8.627.8 billion, compared with US $ 8.093.7 billion the previous year.

But building the reserves has been a difficult task. By October, the general position of the balance of payments was negative for an amount of US $ 675.73 million, a reversal of the positive US $ 878.87 million for that moment in 2019.

However, the trade surplus for the first 10 months of 2020, of US $ 1,743.6 million, was higher than the corresponding period of the previous year of US $ 1,491.6 million.

In fact, total exports fell, from US $ 12,981.4 million to US $ 12,001.3 million. Cocoa and oil revenues were down significantly, but gold revenues were up around 10 percent thanks to a 28 percent increase in realized global market prices. But the import bill fell even faster, from US $ 411,489.8 million to US $ 10,257.7 million during the respective first 10 months of the last two years.

The trade balance more than offset the current account deficit of US $ 1,267.2 million, which was less than the US $ 1,497.3 million last year. But the capital account surplus was also smaller, at $ 365.5 million, compared to $ 2,273.2 million.

Ghana’s gross international reserves as of October were sufficient to cover 4.1 months of imports, reflecting its improved external position. But debt sustainability issues could persuade investors to demand a risk premium when the government goes to market to issue Eurobonds. If that happens, the government will have to choose between talking long enough to roll over existing debt or just taking what it needs for budget support.

This is just one of many crucial decisions he faces when his term, given in December 2016, runs out and he seeks a renewal.