High debt exposes Ghana to shocks – Prof Kusi

Professor Newman Kusi, Executive Director of the Institute for Fiscal Studies (IFS), an economic think-tank, says Ghana’s public debt situation, which has worsened in recent years, has increased overall debt vulnerability.

Prof Kusi, who was speaking at a day’s workshop organised by the Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana yesterday in Accra, said the debt service now absorb a large part of domestic revenues, leaving the country vulnerable to shocks.

“All other debt indicators have deteriorated owing to deteriorated domestic and external borrowing conditions, weak fiscal consolidation, and weakening of the domestic currency. Total public debt service-to-revenue ratio (including payments on external and domestic debt) is not only on a rapidly increasing path but has breached the indicative long-term threshold.”

“At all costs, funds raised by issuing debt should be invested in projects that have a high private or social return. When borrowing in foreign currencies, the government should take great care to ensure that future export revenues will be sufficient to service the debt.

“Clearly, debt accumulation is unlikely to be sustainable if domestic or foreign borrowing is used to finance public or private consumption with no effect on long-term growth. But there are conditions under which even debt used to finance productive investment could turn out to be unsustainable. This happens if the ex-post returns on a project end up being lower than the interest and principal debt repayments.”

According to him, maintaining the country’s debt sustainability would require carefully designed fiscal consolidation measures, combined with a more ambitious medium-term adjustment to spur robust economic growth, enhance domestic revenue mobilisation and reduce the worsening debt and debt-service indicators.

“Maintaining Ghana’s debt sustainability will also depend on a multitude of other factors that include not only a strong and sustained future economic growth but also appropriate borrowing conditions, terms of trade, foreign exchange and interest rate risks, among others.

Prof Kusi said government must formulate and implement prudent, effective and sound debt management strategy, balance the choice of financing sources and instruments, use borrowed funds to invest in projects that have high private or social return, engage in responsible borrowing and also formulate an international debt workout mechanism to maintain debt sustainability.

He indicated that while the opportunities and risks implied by commercial loans and portfolio investments and the necessary restrictions to accessing such resources were debatable, non-debt-creating capital flows should generally be welcomed by the country.

“Indeed, over the past two decades and until the last three years, Ghana has experienced a dramatic surge in foreign direct investment (FDI), which now plays an important financing role. FDI flows do not create debt, but a trade-off emerges between financial soundness and the appropriation of investment returns.

“The current policy framework under the IMF programme which restricts borrowing on commercial terms raises a serious concern as it affects the country’s growth and development.

“Indeed, under the programme Ghana must satisfy strong concessionality requirements to continue to receive assistance and, in this case, a minimum of 35 percent grant element is required on new loans. Coupled with the declining interest rates used to compute the grant element of new loans, the framework severely restricts the country’s access to private development finance.

“There is urgent need for greater flexibility with regard to the concessionality of loans and debt limits in the Fund programme.”