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Opinions of Thursday, 27 June 2013

Columnist: Appiah-Kubi, Kojo

Ghana’s second eurobond and matters arising

Appiah-kubi, kojo, PHD

Ghana has a huge infrastructure deficit which is estimated to cost it annually about 2% in terms of lost GDP growth. It is also estimated that the country needs to spend about $2.3 billion annually on infrastructure, i.e. on roads, water and energy, to ensure a steady economic growth as against its current annual investment of about $1.2 billion. It, therefore, makes good economic reasoning for the country to borrow from outside to fill the financing gap so as to accelerate economic growth and poverty reduction. Hence the $1 billion second Eurobond of Ghana stands as one potent sources of development financing for Ghana, just like the many other African countries that placed on the international financial market about $7 billion of debt (apart from South Africa) in 2012. However, infrastructure does give us any reason to be complacent about risks inherent in debt (bond) financing. This piece therefore discusses some matters that could arise out of the second Eurobond and its wider implications that need to be considered as part of the political discourse.
Indeed the Eurobond has the potential to bridging the financing gaps of the country. That notwithstanding it is important to regard the Eurobond as a debt creating instrument and accordingly only as an alternative source of development financing. Thus at the centre stage of the discussion should rather be a Development Financing Framework for the country’s development of which bond financing could be part. Ghanaians should rather be demanding from the government plans it has put in place to ensure adequate (domestic) resource mobilization for financing accelerated growth and poverty reduction. Currently the country has a development policy framework/strategy (GSGDA) but no financing plan or framework to support its implementation. Such a demand therefore is indeed currently very necessary if the country wants to prevent becoming HIPC again.
The country’s financial management is plagued with lack of fiscal prudence. In 2012, for instance, this fiscal indiscipline resulted in a historic budget deficit equivalent to 12.0 percent of GDP (excluding huge expenditure arrears and commitments) as against a deficit target of 6.7 percent of GDP. In the light of such fiscal indiscipline on the part of the government it is important to raise concerns with the proposed utilization of the $1 billion Eurobond issue, particularly, when the proceeds or parts thereof are to be added to the consolidated fund as counterpart funding for already approved projects and to finance capital expenditures for the 2013 budget. Moreover, the fact that the bond proceeds are to be used to plug some holes in the 2013 budget, when it did not project for such revenues in the budget, also suggests that the projected fiscal deficit of 9% for 2013 could be higher. Consequently the much talked about government fiscal consolidation may likely be a mirage and this can have a negative effect on the credit rating of the country.
The country is issuing its second Eurobond. The government of Ghana intends to use the proceeds from the bond primarily to provide counterpart funding for projects already approved, mainly through agreements, capital expenditures in the 2013 budget statement, and refinancing of maturing domestic and foreign debts to reduce the cost of borrowing as well as partial and gradual redemption of the Ghana first Eurobond. But how much do Ghanaians know about the utilization of the proceeds from the first Eurobond? Thus before going for the second issue it would have been important to bring into the political discourse an impact assessment or, at least, an in-house study of the first one to provide useful lessons for the second Eurobond. The author is not aware of any such study having been so far done.
Another issue that needs to be discussed in connection with the Eurobond is what independent effect is it likely to have on the interest rate and, if any, what macroeconomic consequences would this impact on output, the interest rate, and the crowding out of private expenditures. Even though there is not much evidence of these effects to enable a clear generalisation the little available evidence for Ghana suggests that the Eurobond to finance government expenditure (or, for that matter, the on-going deficit) is likely to exert independent upward pressure on the interest rate. This happened in 2008 just after the first sovereign bond issue when almost all the money market rates followed a general trend of marked increases.

The Eurobond would definitely have exchange rate implications. The Bank of Ghana hopes that the proceeds would help to stabilise the cedi which is currently under pressure. The evidence from the first Eurobond, however, appears to point to a different direction. The period after the first Eurobond, particularly 2008, appears to have experienced the most violent cedi depreciation during the whole eight year Kuffour regime. Have we learnt any lessons from that?
Furthermore it is also important for Ghanaians to know how far the availability of the bond proceeds is going affect government spending allocations through “fungibility”, whereby the bond proceeds pay not for items for which they are accounted but for marginal expenditure they make possible. What is the assurance that the Eurobond would directly or indirectly not finance the already increasing government consumption expenditure (for instance, salary increases) as against its capital expenditure? The Minister of Finance has, for instance, cited the Accra-Kumasi road, whose construction has hitherto been financed through the budget, as one of the likely items for which the bond proceeds would probably be used to finance. Given that the road would have been constructed using budget revenues anyway, is the availability of the bond proceeds not going to free up resources for something else, probably for salary or consumption expenditure increases for which the government is now seriously under pressure. Let us not forget that the government consumption expenditure has since 2009 consistently increased against capital expenditure, with 2012 going up by about 11%. Hence comparing government expenditure with and without bond issuance, it can clearly be seen how the bond proceeds would in effect pay for salary or other consumption expenditure increases even though they may be accounted against capital expenditure such as the Accra-Kumasi road. On the other hand it is important to raise the possible impact of the bond proceeds on government tax efforts, as there is ample evidence that the availability of external inflows is associated with reduced tax efforts.
Ghana faces currently serious external account challenges with worsening trade and current account balances. The trade and current accounts for 2012, for instance, showed deficit balances of about 10.6% and 12.3% of GDP respectively. Against this backdrop it is important to bring into the political discourse the possible impact of the bond issuance on the balance of payment accounts. This is very necessary as much of the proceeds are likely to be used to import goods and services and thereby exacerbate the already precarious negative balance of payment situation. Similarly the bond issuance can affect negatively the country’s export competitiveness through the “Dutch Disease Effect” if these significant foreign inflows result in an appreciation of the exchange rate and Ghana has experienced this contagion disease before.
Worthy of discussing is equally the monetary and inflationary impacts. The proceeds of the Eurobond are likely to be deposited with the Bank of Ghana prior to spending and refinancing of other debts. This could, c.p. increase the net foreign assets and consequently increase the money supply and fuel inflation. In the event of a liquidity increase of the banking system, the government may be forced to mop up the excess liquidity with domestic debt instruments and consequently crowd out private investments. Similarly the Eurobond can impact negatively on investment and growth if it leads to increases in national consumption and declines in savings levels. This appears to be the case, particularly, in developing countries including Ghana where evidence exists to suggest a direct positive relationship between national (government) consumption and imports, and external inflows. The Eurobond is a commercial loan and would definitely increase the debt stock of the country with long-term implications for both fiscal and foreign exchange gaps. As the debt stock increases so would possibly the debt burden costs of the country and the need for foreign exchange increase.
One of the reasons for the Eurobond is to refinance maturing domestic and foreign debt to reduce the cost of borrowing as well as partial and gradual redemption of the 2007 Eurobond on the face of the relatively low global interest rates. Much as this makes economic sense, the success would depend on the stability of the exchange rate regime. If the Eurobond destabilizes the cedi and causes violent depreciation in the cedi value the government may still need to mobilise more cedi resources to service these debts in the future. It remains everyone’s guess how much savings would then be realised.
It is also worth raising the issue of the tenures of the Eurobond to match the longer project or concession period. The first Eurobond was issued for a period of ten years against much longer project period. It is instructive to note that some of the projects of the first Eurobond are yet to be completed let alone to start earning money for repayment of the debt. Consequently it remains to be asked why Ghana has not chosen a longer bond period, when it has been possible for countries like Morocco to raise $500 million Eurobond with a 30-year maturity.

According to the government part of the proceeds is to be used to finance infrastructure projects in the country. Given the difficulty in tracking effective and efficient utilization of monies put in the consolidated fund and the usual cost overruns of consolidated funded projects, it is appropriate to ask why the widely recommended approach of Special Purpose Vehicles was not adopted. As is well known such special institutions or funds are efficient in investing in projects with potential high risk and long gestation period, which are characterized by uncertainties in demand or cash flow generation.

Indeed matters likely to arise from the second Eurobond are enormous. That is precisely the reason why it is important to tread cautiously with the Eurobond and seriously weigh these matters appropriately in order to ensure that the right things are done, past costly mistakes avoided and anything done is in the maximum long-term interest of the country.