Ghana’s foreign debt obligations and the cedi’s value

The public debt level and the decisions made by government that affect it have provided fuel for an endless, intense debate among Ghana’s politicians. Unfortunately, as they are often wont to do, most of their contributions to the debate are deliberate misinformation and, in some cases, outright falsehoods, all aimed at scoring political points, whether deserved or not.

For instances opposition politicians typically discount the effect of the cedi’s depreciation, by always using cedi denominated debt figures, even when assessing the foreign component of the public debt, in order to create the impression of inordinate new borrowing by the incumbent government. They also count all debt securities issuances over a given period of time as entirely new debt, even though they know that most of it is actually used for refinancing maturing old debt.

But underneath the political mischief that Ghana’s political class on both sides of the political divide unfailingly engage in, there are issues of crucial importance, not only for the macro-economy as a whole, but also for the micro-economies of individuals and their households.

One of immediate concern to this newspaper is the recent confirmation by the Ministry of Finance that half of Ghana’s public debt exposures involve foreign exchange obligations. This confirms this newspaper’s assertion that the official classification of the public debt, which puts the foreign debt segment at less than two-fifths of the total public debt is misleading.

Related to this is our assertion that Ghana’s debt sustainability is better assessed by the debt servicing to total revenue ratio, which measures the country’s ability to meet its debt servicing obligations, rather than by the public debt of Gross Domestic Product ratio, which simply measures the size of the debt against the size of the economy. Here it is instructive that while the recent rebasing of the economy has significantly lowered the latter ratio, thus making Ghana look more comfortable with its current public debt levels, it has not added an iota to the country’s ability to service its debt.

The combination of the two assertions paints a gloomier picture than the one produced by the official data being more widely used, but unfortunately that gloomier picture is also the more realistic one. For one thing it helps explain why the cedi continues to depreciate significantly despite a continued merchandise trade surplus; the country is using an inordinate proportion of its foreign exchange inflows to service its foreign exchange debt exposures, which are far larger than official debt data reveals.

Indeed, before the current net out-flows of foreign investment in government’s debt securities issuances began last year, the net inflows that preceded them – in the form of foreign borrowing but classified as domestic borrowing because the debt securities issued were cedi-denominated – served to give the cedi inordinate strength, slowing the depreciation rate at a time that the country was making a consistent merchandise trade deficit that should have brought about considerably faster depreciation.

It is now time for the political class – and the rest of us too – to do a reality check and classify and assess our indebtedness using the most relevant ratios rather than the ones that give us the most comfort or the most political points. It may be comforting for now to be self-delusional but all the while, the economic problems that we are resultantly ignoring are being left to fester.