By the time the initiative ended in 2006, Ghana’s total public debt stock was US$780 million (25% of GDP). The debt stock has since risen by 7000% to $54 billion, which is 78% of GDP. The current debt to GDP ratio is 78%, while the average for developing countries is 60%. Economist, Adu Owusu Sarkodie, explains how this happened, why it’s a problem and what can be done.
How did Ghana get into this situation?
After the Heavily Indebted Poor Countries initiative ended in 2006, the public debt stock has largely been driven by the continuous accumulation of budget deficits (48.6%), the currency deprecation (28.2%), and off-budget borrowings (23.2%). Between 2017 and 2019, Ghana’s debt stock grew astronomically for three main reasons, beyond the normal drivers.
First was the country’s energy sector debt. This is debt owed to the country’s power producers and suppliers. It has been accumulated largely by Ghana’s state-owned enterprises, that struggle to generate enough internal revenue to pay their loans. In 2021, for instance, the government has so far provided a $3 billion bailout.
Second was the financial sector clean-up exercise undertaken by the country’s central bank. Between 2017 and 2019, the Bank of Ghana revoked the licences of some banks, savings and loans, micro-financial institutions, finance houses, and investment institutions due to their insolvency and financial malpractices. The government had to raise another $3 billion in bonds to pay customers of the defunct banks and financial companies.
Thirdly, like many countries in the world, COVID-19 has had a serious impact on the Ghanaian economy due to lockdowns, border closures, restrictions in movement, and the fall in crude oil prices. The economic restrictions resulted in a fall in revenue of US$2 billion, while COVID-19 expenditures increased total government expenditure by US$1.7 billion, giving a total fiscal impact of almost US$4 billion in 2020.
How bad is it?
The current rigidity in the Ghanaian budget makes it impossible for the government to do anything without borrowing. Rigidity refers to those statutory payments in the budget over which the government has no control. Just two of the statutory payments (compensation of employees and debt service) consume the total revenue and grants. In 2020, debt service alone (paying interest plus amortisation) consumed 70% of revenue. That’s close to the level of 72% before the country subscribed to the Heavily Indebted Poor Countries initiative.
Based on the estimated revenue and expenditure figures in the 2021 and 2022 budgets, the debt service burden is expected to worsen in 2021 at 82%, before improving at 45% in 2022.
For the government to be able to meet the remaining statutory expenditure and all other discretionary expenditures, it will have to borrow. If the government does not instil discipline and raise revenue domestically, or cut down some expenditure (or both) to create fiscal space, it will have to seek help in an International Monetary Fund programme.
Recently, some international credit rating agencies have [downgraded] Ghana’s economy, citing the country’s inability to raise enough revenue to service its debt. The signal this sends to investors is that Ghana’s sovereign bond is not profitable and its default risk is too high.
The implication of this is that the government may not be able to raise money from the international capital market. The options are to either borrow domestically and crowd out the private sector, or borrow from other countries. If this option is exhausted, it will have to seek an International Monetary Fund programme.
What has been the impact on the economy?
The impact of the huge public debt and the slowed growth of revenue is that the country has to borrow to finance its spending every time. Until the government borrows it can do virtually nothing. This has slowed down the government’s ability to implement its programmes and policies to grow and transform the economy and create jobs.
Over a 16-year period (2006-2021), the country’s economic growth was largely driven by the extractive sector. This sector is capital intensive: it uses more machines than human beings. The effect is that, though there is some economic growth, the source of growth is not from sectors of the economy that can generate employment. This is why unemployment has increased from 5% to 13%.
Are there any solutions?
Ghana finds itself in difficult position. The only way out is to raise enough revenue to finance its development. Even if the government succeeded in borrowing, it would still have to raise revenue domestically to service the debt. Therefore, there is no substitute for domestic resource mobilisation. The projected budget deficit for 2022 is $6 billion. The government will have to raise revenue through taxes (without overburdening the taxpayers) and non-tax sources.
The Institute for Fiscal Studies researched the sources of revenue to the government in 2018 and made the following recommendations as the possible additional revenue to Ghana’s public finance annually:
- Personal income tax of the workers in the informal sector – $47 million
- Property tax – $157 million
- Tax exemptions – $790 million
- 55% share of the extractive sector – $4 billion
According to the Ghana Statistical Service, there are about 7.7 million workers in the informal sector but it is difficult to measure their incomes. There is a difficulty in taxing incomes that are unknown. That is why there seems to be a good economic justification to tax them using the proposed e-levy. But the levy must be designed to achieve the objective of taxing the incomes of workers in the informal sector.
In addition to raising revenue, the government must also plug all loopholes, and ensure prudent management of public finance. The Auditor-General department and Public Accounts Committee of Parliament usually identify financial irregularities in their reports.
The recent Auditor-General’s report identified about $1.8 billion worth of irregularities in public finance. When these irregularities are checked, the government will gain the confidence and support of the citizens.
If the current growth in the public debt stock continues, then the country is likely to find itself in debt distress, which might lead to seeking an International Monetary Fund bailout.
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