Ghana’s Borrowing Spree …Any Cause for Worry?

Ken Ofori-Atta, Minister of Finance
Ken Ofori-Atta, Minister of Finance

Much has been said about Ghana’s aggressive borrowing spree from domestic and international capital markets since 2016, and deservedly so. The decision to raise capital through the issuance of international bonds, otherwise known as Eurobond, has become a mainstay in Ghana’s borrowing mix.

According to economists, Eurobonds provide a cheap source of funds to support the country’s recurrent and capital expenditure. This points to government’s plans to turn to the international capital market every year.

2016 Eurobond Issue

In the 2016 Budget Statement, approval was given to issue up to US$1.0 billion sovereign bond on the International Capital Market (ICM). This was Ghana’s fifth Eurobond floatation on the ICM.

The bond had a face value of US$750 million and was accepted at a yield of 9.25 percent. The Bond was a back-end amortizing maturity with a weighted average tenor of 5 years.

The principal is to be paid in three installments of US$250 million in September 2020,

September 2021 and September 2022.

Capital Market Developments

As stated in the 2016 Budget statement, government adopted the Book Building process as a means to raise funds from the domestic capital market. As part of the process, government issued 3-year, 5-year and 10-year bonds through the book building approach.

In October 2016, government issued its maiden domestic US-dollar denominated bond. The bond had a 2-year tenor and yielded US$94.64 million at a coupon rate of 6 percent.

The offer was open to resident investors only. The 2-year bond had one of the lowest yields apart from the 2007 bond which is currently trading at about 4.1 percent and maturing in less than a year.

In November 2016, government issued its first 10-year domestic bond which yielded an amount of GH₵438 million at a cost of 19 percent and matures in 2026.

Cedi Denominated Bonds

Just last week, the government raised a total of GH¢1.49 billion in a five-year bond at a coupon rate of 18.25 percent on the local bond market was heavily oversubscribed as bids amounted to 1.7 billion cedis.

Originally, the government targeted GH¢500 million Ghana per bond calendar.

According to government officials, the transaction had attracted very good interest from a wide range of top-tier domestic and offshore credit investors. The coupon rate is appropriate for a bond with a tenor of 5 years, according to financial analysts.

Early this month, the Akufo-Addo-led government announced that it was seeking to raise GH¢17.4 billion in the third quarter of this year from the securities market.

From July to September, a GH¢2.6 billion 15-year bond will be issued this month (August) and two five year bonds, one was expected to be issued in July and the other in August. While the rest will be 91 and 182 day bills which are expected to raise about GH¢11 billion.

Ghana as part of the new debt management strategy recently implemented a “buy-back” of $100 million of the Ghana 2017 bond using the newly established sinking fund. As a result, the balance on that bond has been reduced to $400 million, which will be redeemed from the proceeds of the new issue.

Though the fifth issued Eurobond (2016) in a broader market context was considered a significant transaction because it represented the first sub-Saharan African (excluding South Africa) sovereign issue in 2016, the rate was a lot higher than what it cost COCOBOD to secure its international facility.

COCOBOD on September 21 last year signed a $1,8 billion loan facility for the purchase of cocoa beans for the 2016/2017 crop year which came with an all-inclusive rate of 1.468 percent, far cheaper than the interest government got on its Eurobond.

Debt Burden

This year the total interest payment is estimated at GH¢13,9 billion, equivalent to about 11 percent of GDP and about 30 percent of total expenditure. Of this amount, GH¢2,7 billion will be expended on external interest, while GH¢11,2 billion will be for domestic interest payments.

But, transfers to key funds like the District Assemblies Common Fund (DACF) and the Ghana Education Trust Fund (GETFund) for this year sum up to GH¢2,36 billion, which falls several billion short of the cost of borrowing.

Also, the huge amount to be spent on interest payments this year is far more than the amount planned for capital expenditure.

Ballooning Public Debt

Recent figures released by the Bank of Ghana (BoG) revealed that the government has, within three months, added GH¢9.4 billion to the country’s debt stock.

This brings the country’s total debt (both domestic and foreign) to GH¢137.2 billion, representing 67.5 percent of GDP as at the end of May 2017, up from GH¢127.8 billion (62.5 percent) recorded in March, this year.

Of the total public debt of GH¢137.2 billion , domestic debt of GH¢63.9 billion constituted 31.4 per cent of GDP, and external debt of GH¢73.3 billion constituted 36.0 per cent of GDP.

The figures were contained in the Bank of Ghana’s economic and financial report for the first five months of 2017.

With the total public debt stock standing at GH¢137.2 billion (67.5 percent of GDP), it implies that Ghana loses 67.5 percent of its GDP to the ever-growing public debt. GDP is defined as the total market value of all final goods and services produced in a country in a given period, usually a year or quarterly.

Every Ghanaian owes over GH¢5,716

Ghana, with an estimated population of 24 million people, which when divided by the current public debt of GH¢137.2 billion, every Ghanaian would owe over GH¢5,716 to the country’s creditors, both internally and externally, as of May 2017.

Public debt accrues over time, when the government spends more money than it collects in taxation, and as a government engages in more deficit spending, the amount of public debt increases. That is the exact sad story of Ghana, according to economists.

But the government explained that the increase in the public debt stock was the result of deficit financing and payment of inherited arrears and debts.

Widening Debt-Trap

Economists maintained: “As it stands now, the government cannot immediately get out of the debt-trap, because maturing obligations cannot be paid out of its relatively low revenue base.

“Restructuring of the debt from short to long term may bring some respite, but can only be sustainable if the short term relief is combined with strong fiscal consolidation.

“While swapping old debts with new ones, it is important that any surplus of the new debt, over and above the old debt, goes into projects that can pay for themselves.

“Otherwise, the restructuring would only lead to growing the debt without a corresponding growth in productivity or GDP, leading to a worsening situation of the debt-to-GDP ratio”, according to them.

An analysis of the country’s revenue base as a percentage of GDP, and the interest payment as a percentage of revenue, shows that the current level of public debt-to-GDP ratio may not be sustainable.

Given the country’s relatively low levels of revenues, vis-à-vis high and rising expenditure, the high debt-to-GDP ratio may make it more difficult for Ghana, in the medium term, to pay its debts.

This high debt, with its attendant high interest, contributed in creating a panic in the domestic and international markets, and credit rating agencies had to reduce Ghana’s rating further downwards.

Low Revenue to GDP Ratio

The total tax revenue to GDP ratio for most developed countries is about 40%, but the total revenue for Ghana, from January to April 2017, was low.

The fiscal performance during the first four months of 2017 was also mixed. Revenue fell short of the budget estimate by GH¢2.3 billion or 17.1% during the period, due largely to the slow growth of the non-oil sector of the economy. Total government expenditure was also lower than budgeted by GH¢3.6 billion or 20.5%. Thus while revenue fell short of the budget estimate, expenditure was cut more severely than the revenue shortfall, causing the budget to record a deficit of 1.5% of GDP, lower than the budget estimate of 2.2% of GDP.

The worrisome aspect of this development is that the expenditure cut affected the much needed capital spending, payments to statutory funds, clearance of arrears as well as spending on goods and services. The deficit was also financed entirely with cedi-denominated bonds, of which non-residents bought almost all of them.

Clearly, the revenue base for Ghana is too small to warrant the 67.5% debt-to-GDP ratio. The current debt level may be sustainable, only if Ghana can double its revenue base at the current GDP level to achieve a revenue-to-GDP ratio of not less than 25.0%, but this cannot be achieved in the short term.

Government needs to pull the brakes on the expenditure side by prioritising its projects, and making sure loanable funds can be matched by revenue generating activities.

The current Finance Minister, Ken Ofori-Atta, has started looking at this option, but he should have done this much earlier. As it stands now, it is going to be difficult for Ghana to get out of the debt trap.

Mixed Economy Performance

Developments in the real sector of the economy during the first quarter of 2017 was mixed. Although the economy witnessed a strong overall GDP growth during the period, the growth of non-oil GDP was subdued, according to the Institute for Fiscal Studies (IFS) mid-year budget review.

Real GDP grew by 6.6% year-on-year in the first quarter of the year, compared with 4.4% recorded in the same period last year. Crude oil production from the Jubilee field and the coming on stream of the Tweneboa, Enyenra and Ntomme (TEN) fields together increased oil production by as much as 58.9% year-on-year, which helped boost the overall GDP growth, it added.

Non-oil real GDP, however, grew by only 3.9% against 6.3% growth recorded in 2016, due largely to low activity in the services sector, which grew by 3.7% in the first quarter of this year compared with 6.6% in the same period last year.

By Masahudu Ankiilu Kunateh, African Eye Report

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