Moody’s Investors Service, often referred to as Moody’s, has stated the currency depreciation will be the major contributor to Ghana’s rising debt-to GDP-ratio in the 2022 fiscal year.

According to the international rating agency, the local currency, the cedi, has depreciated by around 40% against the US dollar since the start of the year, exacerbating the challenges from an already high debt burden.

“Because foreign currency-denominated debt accounted for 37% of GDP at end of 2021, Moody’s forecasts that the currency depreciation over 2022 will be the main contributor to the rise in the debt-to-GDP ratio this year to more than 100% of GDP (104%, 26 percentage points higher than in 2021).”
Moody’s

In its recent assessment of Ghana’s economy, Moody’s indicated that Ghana’s balance of payments position is deteriorating.

According to Moody’s, significant outflows in the first half of 2022 led to a fall in foreign exchange reserves to $5.9 billion as of the end of the second quarter of 2022, down from $8.4 billion at the beginning of the year. The foreign exchange reserves currently cover 4.5 months of imports as of first quarter of 2022, which is the latest data available.

Rate hikes and borrowing costs

Global and domestic rate hikes result in higher interest rates for the government while the loss in purchasing power induced by high inflation is a drag on economic activity.

Moody’s noted that higher government borrowing costs have rapidly increased its interest spending, which consumed almost half of the government’s revenue in 2021, a proportion Moody’s forecasts to rise to 58% in 2022, one of the highest globally.

The rating agency indicated that there is the possibility of the Bank of Ghana hiking its interest rate in an attempt to tame galloping inflation.

“Further monetary policy tightening is likely, with negative effects on already extremely weak debt affordability. The Bank of Ghana recently reported that the inflation rate climbed to 34% at end of August 2022 despite previous monetary tightening; the highest reading in Ghana since July 2001.”
Moody’s

The deteriorating macroeconomic conditions, in particular the deep inflation shock, have further complicated the policy trade-off for Ghana’s authorities, Moody’s noted.

This, according to Moody’s, is limiting government primary spending to prioritize paying interest to creditors which is difficult to reconcile with economic and social development objectives.

This consequently, it noted, continues to fuel risks of further social discontent and damaging Ghana’s economic and social outcomes in the medium term.

Government to miss deficit targets for 2022

Against the backdrop of higher inflation and larger interest payments, the government is left with very limited fiscal policy levers to reverse the deteriorating trend in debt burden and affordability and restore liquidity and external stability. Moody’s expects the government not to achieve the reductions in fiscal deficits targeted in its 2022 budget and instead to run stable deficits.

Notwithstanding the government’s intention at the start of the year to broaden its tax base, its capacity to raise its revenue intake above 16% of GDP in 2021 is constrained by the weak macroeconomic environment.

Meanwhile, Moody’s noted that Ghana’s room for manoeuvre on the spending side is also limited.

“The interest bill, over which the government has little control in the short-to medium-term, constrains budget flexibility, especially amid large gross borrowing requirements (around 30% of GDP in 2022) and likely no access to international capital markets nor sizeable support from the donor community.”
Moody’s

The rating agency noted that there is a limit to the extent to which the government can lower primary spending despite government’s announcements of large cuts in its main primary spending items earlier this year.