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Opinions of Tuesday, 12 January 2016

Columnist: Graphic.com.gh

Interest payment headache

Interest payment has become a major factor behind the country’s fiscal deterioration, besides wages and salaries, and requires serious attention.

Interest costs have risen astronomically in recent years in Ghana due to the large budget deficits registered over the years, especially since 2012, which were financed by borrowed funds from both domestic and foreign sources at high interest rates.

Interest payments accounted for an average of 18.4 per cent of domestic revenue in 2009-2010, dropped to an average of 14.8 per cent in 2011-2012, and rose to an average of 30.3 per cent in 2014-2015.

In fact, the 6.2 per cent of GDP interest payments made in 2014, the projected 7.0 per cent in 2015, and 6.6 per cent in 2016 will be three successive years since 2000 that total interest payments would be larger than total capital expenditure.

Interest payments for the first five months of this year totalled GH¢3.3 billion, reflecting 8.7 per cent lower than the budget estimate of GH¢3.6 billion.

In 2016, interest payment is projected to absorb 28.8 per cent of total domestic revenue.

This means that for every GH¢1.00 to be collected as domestic revenue, GH¢0.29 would go into interest payment, leaving the rest for other recurrent expenditures, including wages and salaries, other statutory demands such as transfers to government units, and the much-needed capital expenditure

In addition to increases in the debt stock itself, rising interest costs are the result of interest rate hikes and exchange rate depreciation.

In fact, the 6.2 per cent of GDP interest payments made in 2014, the projected 7.0 per cent in 2015, and 6.6 per cent in 2016 will be three successive years since 2000 that total interest payments would be larger than total capital expenditure.

Interest payments for the first five months of 2015 totalled GH¢3.3 billion, reflecting an 8.7 per cent lower than the budget estimate of GH¢3.6 billion.

According to the government, the lower interest payment was partly due to the lower than estimated domestic borrowing to finance the budget during the period. In the 2016 Budget, interest payments are estimated at GH¢10.5 billion, compared to the projected GH¢11.7 billion wages and salaries costs.

The government’s borrowing to finance large budget deficits in recent years is been one of the major factors that have caused interest rates in the country to rise significantly, increasing the cost of borrowing. As its borrowing increases, the government has to pay higher interest rates to the holders of its bonds.

In Ghana’s case, increased borrowing by the government has pushed up interest rates because the market fears that there is a high chance of default on the part of the government, therefore it demands higher interest rates in return for the greater risk.

Meanwhile, the higher interest rates on government bonds tend to push up other interest rates in the economy, increasing the cost of credit, with negative implications for investment and economic growth.

These are indeed worrying developments.