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Business News of Sunday, 25 October 2015

Source: The Finder

Interest costs to exceed wage bill, experts warn

Finance Minister Seth Terkper Finance Minister Seth Terkper

Economists are warning that Ghana’s interest payments could be the largest item on public expenditure this year if government continues to contract loans at outrageous interest rates.

Interest payments on loans could be at par with or outstrip the public sector wage bill, they argue.

Government expenditure on salaries and wages of public sector employees for 2014 stood at GH¢10,466.82 million while interest payments component of recurrent expenditure for the same year amounted to GH¢7,080.87milion.

Meanwhile, total interest payments for this year is projected at GH¢9,557.2 million while GH¢10,286.5 million is estimated for the payment of wages, salaries and allowances of government employees.

The concerns come as the Bank of Ghana (BoG) on behalf of government issued yet another bond worth GH¢1.5billion from both domestic and foreign investors last week.

Many are interested in knowing the interest government will be paying on the three-year bond considering Ghana’s present economic challenges and more so the fact that government recently secured $1billion from the Eurobond issue at 10.75 percent.

Proceeds from the three-year bond will be used to pay off another three-year bond floated in April this year meanwhile experts say government could pay more than 23 percent as interest rate on the new bond.

The interest government will pay on the bond will undoubtedly influence lending rates over the three-year period.

Ratings Agency, Moody’s, says Ghana’s interest cost now accounts for one-third of government’s revenue.

“Cost of interest as a percentage of Gross Domestic Product (GDP) rose to 7 percent in 2014, from 2.5 per cent in 2011,” the Agency said in a statement.

Ghana's interest burden is highest amongst Fitch-rated sub-Saharan African nations. Fitch maintains that the country’s external position remains vulnerable, and growth prospects have been undermined by its fiscal and external imbalances.

Economist and Lecturer with the University of Ghana Business School, Dr Lord Mensah describes as worrying the escalating interest on Ghana’s debts and points out that “the situation is alarming because we will soon have to use all revenues we generate to pay interest on loans while the principal is waiting to be cleared.”

Dr Mensah calls on government to immediately halt the borrowing and assess the interest costs on its loans.

The 10.75 per cent interest demanded by investors who patronized the country’s fourth Eurobond issue was the highest among its peers who floated bonds around the same time.

Kenya, which issued a $1.5billion bond at the same time, got 6.85 percent while Ivory Coast earned a rate of 6.625 percent for $1billion. Poland issued its bond at 0.54 per cent.

Since the bond was issued, economists and market watchers have been critical of government with some of them describing the interest rate as “disappointing.”

Chief Executive Officer of Dalex Finance, Mr Kenneth Kwamina Thompson said the rate given to Ghana smacks of a lack of trust in the economy.

Mr Thompson believes that the development is simply a reflection of the market’s perception of Ghana, which he says is one thing the country has never faced up to.

Ghana, he stressed, “is broke and the market thinks Ghana will not be able to implement the programme it has signed up to, under the IMF programme and we should take that as a signal.”

“The earlier we started facing up to our debt as well as the economic issues and deal with them squarely, the better but this is a signal, and in the wrong direction” he added.

The Minister of Finance, Seth Terkper, has maintained that high domestic interest rates, coupled with the continuous rise in the level of domestic borrowing to finance the budget over the years have accounted for the rising interest costs.

Ghana has fallen into a debt trap as interest rates continue to surpass GDP growth rates, suggesting that interest payments will probably be financed through additions to public debt or at the expense of other key government operations.

According to experts, the risks that arise from poor fiscal management are grave and threaten Ghana’s bright economic prospects over the medium term if left unaddressed.