Ofori-Atta is banking on boosting revenues via the politically unpopular Electronic Transactions Levy, which is yet to be passed in parliament. Higher tax receipts and the promised swingeing cuts to public spending will allow the government service its ballooning debts, but the fallout from such a move could cause more political headaches for President Nana Akufo-Addo’s government.
Ofori-Atta and his team are also taking on international ratings agencies that have questioned Ghana’s economic trajectory. Moody’s has downgraded Ghana’s senior unsecured debt ratings to Caa1 from B3. It has forecast that the country’s debt ratios will continue to deteriorate in the short-term and constrain policy options.
“Moody’s estimates that government debt ended 2021 at 80% of GDP while interest payments alone consumed half of government revenue that year (positioning Ghana with the second largest ratio among Moody’s rated sovereigns),” it said.
Rating firm Fitch has also downgraded Ghana’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-‘ from ‘B’. The outlook for the country is negative as Fitch reckons that Ghana will not be able to borrow from the international capital markets this year and perhaps even the next. It adds that Ghana’s foreign reserves have become dependent on issuing Eurobonds each year.
“As of July 2021, non-resident investors held just below 20% ($5.8bn) of Ghana’s outstanding domestic government debt,” says the Fitch report. “While the maturity of these holdings is long-term, an outflow would put additional downward pressure on Ghana’s reserves.”
Ofori-Atta and his team dispute the latest ratings, describing Moody’s score as “based entirely on a desktop exercise, virtual discussions and what we believe to be the omission of critical data”.
“The Government of Ghana is therefore completely puzzled by the decision to downgrade Ghana’s credit rating to Caa1, despite the series of progressive engagements we had with the team from Moody’s,” the finance ministry said in a statement on 6 February, arguing that the quality of its data and the government’s commitment to cut spending by 20% showed evidence of a credible fiscal consolidation plan.
Ballooning public debt stock
According to the central bank, Ghana’s public debt stock as of September 2021 stood at GHC341.8bn ($54bn) representing 77.8% of gross domestic product (GDP). Out of the figure, domestic debt stands at €24.8bn ($28bn), which is equivalent to 40.5% of GDP, while external debt is €22.8bn ($25.9bn).
The ‘Joint World Bank-IMF Debt Sustainability Report (2019)’ warned that Ghana was at a high risk of external debt distress, due to heavy one-off expenditures, rising interest payments and low tax revenues.
When you do an IMF [bailout] programme, the World Bank, African Development Bank and development partners have clarity [on your policy credibility].
Three years later, and after the effects of the pandemic, the risks have grown, as have the calls on the government to seek a deal with the IMF.
Seth Terkper, a former finance minister with the opposition National Democratic Congress, said an IMF deal would rebuild confidence in Accra’s finances.
“You borrow because you have commitments and you don’t want to default, but then alongside […] that one, you borrow part of the money from the market to refinance and pay down some of the debt,” said Terkper, who signed a deal with the IMF in 2015.
“When you do an IMF [bailout] programme, the World Bank, African Development Bank and development partners have clarity [on your policy credibility],” Terkper told journalists in Accra.
IMF is a no-go area
Even so, the government is still ruling out an IMF deal, arguing that it can collect more tax revenues to fill the finance gap. Such a move depends on whether the controversial E-Levy, which it hopes will generate some €800m ($908m) a year, will be passed.
“We’re not going to the IMF,” Ghana’s deputy finance minister John Kumah tells The Africa Report. “That is the government’s position. We’ve the capacity to deal with our own issues and it starts with increasing domestic revenue.”
“The E-Levy is the game-changer. Going to the IMF is disastrous as my minister pointed out recently. We’ve come up with a solution to increase domestic revenue [E-Levy] and we look forward to it being passed in Parliament.”
Dr Daniel Amateye Anim, at the Policy Initiative for Economic Development, says if the government fails to push the E-levy through parliament, the alternatives would be costly. The first option would be to borrow from the international capital markets, which would “further increase the debt stock”.
Anim tells the Africa Report: “The government will not get a competitive rate due to the recent downgrade of the economy by Fitch to “B-“ with [a] negative outlook. Thus, it will come with [a] high interest rate.”
Still, an IMF bailout would raise tax rates and result in the suspension of some flagship education and health programmes as well as recruitment in the public sector. There would also be strict monitoring of state spending.
Anim says the last option would be to borrow from the domestic market. “It will deny the private sector from having access to liquidity since the banks may channel excess liquidity to [the] government. This phenomenon may affect productivity.”
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