Data released by the Bank of Ghana at the weekend has confirmed the depth of Ghana’s fiscal troubles – the fiscal deficit for 2021 is a record high, propelled by the effects of COVID 19 on public finances and the economy as a whole, and this has accelerated the growth of the public debt to well beyond the generally accepted threshold for debt sustainability of 70 percent of Gross Domestic Product.
As of the end of November last year the public debt to GDP ratio had risen to 74.4 percent, with the total debt standing at GHc286.9 billion. This suggests that the full-year ratio will be close to the 76 percent predicted by Fitch a couple of months ago. The accuracy of that forecast derives from Fitch expecting that government would achieve its revised fiscal deficit target of 11.8 percent and then doing the ratio math.
Indeed, the latest BoG data indicates that the fiscal deficit target would indeed be met; by the end of November, it was 10.8 percent although expenditure immediately prior to and immediately after the December 7 general elections could conceivably have pushed it higher than that target after all. If that did happen then the end of year debt to GDP ratio would exceed Fitch’s projection.
By end of November, Ghana’s public debt comprised US$24.4 billion in foreign debt and GHc147.3 billion in domestic debt. Interestingly, during 2020 there was a key change in the structure of Ghana’s foreign debt portfolio; at the start of the year, external debt was bigger than domestic debt (32.3 percent of GDP for foreign debt versus 30.2 percent for domestic debt). By the end of November however, this had reversed, with foreign debt translating to 36.2 percent of GDP, lower than domestic debt’s 38.2 percent of GDP.
Importantly though this did not lead to a crowding out of the private sector from the domestic, money market since the increase in domestic debt was largely the result of the BoG’s uncustomary financing of the deficit to the tune of GHc10 billion because of the unusual circumstances created by COVID 19 – since 2015 the BoG, egged on by the International Monetary Fund had stopped financing the fiscal deficit directly from its own coffers,
The surge in the public debt last year was the inevitable consequence of the inordinate, but the necessary surge in the fiscal deficit to 11.8 percent, which is well over twice the 5.0 percent cap imposed by the Fiscal Responsibility Act passed in 2019 but suspended last year because of exigencies created by the effects of the pandemic.
Total revenues and grants achieved in the first 11 months of 2020 amounted to GHc12.1 percent of GDP, down from 15.3 percent generated during the whole of 2019. Tax revenues were particularly hit, falling from 12.2 percent of GDP for the whole of 2019 to just 9.8 percent for the period January to November 2020.
Conversely, the total expenditure for 2020 as a percentage of GDP rose to 22.9 percent for just the first 11 months of the year compared to 19.4 percent for the whole of 2019.
While COVID provides a cogent reason for the sharp increase in the fiscal deficit last year it by no means tells the whole story – simply put, expenditure ostensibly aimed at combating the pandemic and its economic effects provided cover for politically motivated spending towards winning last years polls, but officially classified as social welfare interventions.
A major example of this was spending on the financial sector reforms executed by the BoG and the Securities and Exchange Commission over the past few years. Refund of deposits locked up in insolvent financial intermediation companies, ostensibly to retain public confidence in the concept of saving money with duly licensed deposit-taking institutions was followed last year with the refund of fund placed by the public under the care of licensed fund management companies which had similarly gone insolvent.
This despite clear protestations from industry analysts that investments in managed funds are purely a risky activity that is not supposed to be guaranteed in any way by any institution, government included. Thus government’s refunds of investment in the care of troubled fund managers were correctly seen as politically motivated to win the sympathy of investors at the December 2020 polls.
Along the same lines, the government replaced the medium-term non-interest-bearing bond issued to depositors with some liquidated financial intermediation institutions, with interest-bearing bonds tradeable on the money market (and therefore equivalent to immediate cash refunds on the underlying locked up deposits) immediately the beneficiary depositors threatened to vote against the government at the (then) Impeding elections if their bonds were not transformed into cash refunds.
This unbudgeted expenditure added well over GHc3 billion to the public debt just weeks before the elections, although it did not add on to the fiscal deficit since the government – in defiance of the International Monetary Fund and proper accounting principles have since 2018 classified borrowings to issue its financial sector resolution bond as “off-balance-sheet memoranda items” despite their sheer size and the consequent impact on the state of public finances.
Indeed, by the end of November last year these bond outstanding amounted to GHc15.4 billion in public debt, up from GHc10.6 billion as at the end of 2019, yet the government continues to excuse them from being a part of the fiscal deficit on the grounds that they are one-off debts incurred, rather than part of its regular fiscal activities. These “one-off” debts though have been an ever-increasing part of the public debt for the past three fiscal years and require deficit financing despite the government’s pretending that they only need to be foot-noted in public accounts.
This year, therefore, the government asserts that its priority will be to reel in the fiscal deficit and consequently the public debt to GDP ratio so as to restore Ghana’s dwindling sovereign credit reputation. However, this will be easier said than done. The financing requirements on the existing debt alone may require further borrowing just to meet interest payments; debt servicing now accounts for roughly half of the government’s entire tax revenues.
It is further instructive that although most of the impending record-sized Eurobond issuance will be earmarked for beneficial debt restructuring (which involves replacing relatively costly, short term debt with relatively cheap, longer-term debt) government still plans to use US$1.5 billion as new budget financing; this is considerably more entirely new debt than any previous Eurobond issuance has ever incurred since Ghana began tapping that market in 2007, and on a nearly annual basis since 2013.
The new data from the BoG clearly illustrates the fiscal challenges that lie immediately ahead as the huge treal cost of Ghana’s successful navigation of the health and economic hazards imposed by COVID 19 last year become unveiled.