Ghana currently faces restricted access to external markets financing mainly because of its high level of public debt, risk of debt distress, and increasing debt servicing costs.
Debt levels have risen, driven largely by one-off expenditures on financial sector bailouts and energy sector IPP payments, a growing interest bill, and a weak domestic revenue mobilization.
Expressed as ratios of nominal GDP, the End-September 2021 debt stock was 77.8 percent and in nominal terms, stands at GH¢341,762.7 million (US$58,239.8 million).
Recently, an investment banker and Former Finance Minister, Mr. Seth Terkper, stated that the challenges within the fiscal economy is making it difficult for the country to raise enough funds at favorable interest rate, a situation he described as a major contributor to the high cost of credit.
“Ghana is facing restricted access to external markets, given current level of public debt, risk of debt distress and ratings agencies’ downgrades. Hence, the question is whether the limited domestic market can accommodate most of this financing without private sector “crowding” and, yes, higher interest rates”.
Seth Terkper
The government has consistently, cited the cost of the financial sector bailouts and energy sector IPP payments as major variables that increased the country’s debt in addition to unbudgeted COVID-19 expenditure.
In March 2021, the government placed a tax of 5 percent on the profit-before tax of banks to help defray the cost of the clean-up which is estimated at GH¢21 billion. According to data from the ministry of finance, government has so far collected a total of GH¢146,359,313 since the introduction of the tax till the end of September 2021.
Whilst some of the managers of the defunct banks are being held liable for the failure of the banks and the need for them to refund the monies, government has since not disclosed the total amount of money recovered so far from these alleged people. Hence, how much of the total GH¢21 billion has been recovered up to now?
Composition of debt and interest payment
More structurally, fiscal performance continues to be burdened by low government revenues and growing interest bill as deficit financing shifted from concessional to commercial sources.
As at September 2021, the composition of public debt comprises external debt of GH¢163,652.2 million (US$27,888.0 million) and domestic debt of GH¢178,110.5 million (US$30,351.8 million). This represents a foreign-domestic share split of 47.9 percent and 52.1 percent, respectively.
In the first 9 months of 2021, government spent GH¢25,394 million on interest payments. Of this amount, domestic interest payment amounted to GH¢20,576 million, 4.9 percent higher than the revised target, while external interest payment of GH¢4,818 million.
In 2022, government is expected to spend GH¢37,447 million on interest payments of which domestic interest payments will amount to GH¢28,943 million whilst GH¢8,503 million will used to service external creditors.
The depreciation of the Cedi poses a risk to debt servicing costs especially when 47.9 percent of the total debt is foreign. Government issued a 4-tranche Eurobond with a face value of US$3,025.0 million in March 2021 on the ICM. But rising interest rates means the ICM will be inaccessible to the country in 2022.
This means that the government will now focus on the domestic markets to raise the funds needed to support its budget. Already, majority of the domestic debt is held by the banking sector which means little resources will be available for individuals and corporate institutions to borrow.
According to the Bank of Ghana’s statistical bulletin (May) report, out of the total domestic debt of GH¢171.7 billion as of May 2021, the banking sector held GH¢86.5 billion representing 50 percent of the debt. This suggests that even if there are any funds available to the private sector, interest rates will be very high, especially when the government will be forced to rely on domestic borrowing.
A recent IMF and World Bank joint review highlighted that Ghana is at high risk of external public debt distress with thresholds breached on the PV of external debt to GDP ratio, the debt service-to-exports ratio, and the external debt service-to-revenues ratio. External Markets External Markets External Markets
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