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IFS raises alarm over rising debt

March 15, 2018, 11:40 a.m.

The Institute of Fiscal Studies (IFS) has warned that Ghana’s rising public debt has put the country at the risk of falling back into an extended debt trap, with economic stagnation and possible increases in poverty rates and the failure to implement the Sustainable Development Goals.

Prof Newman Kwadwo Kusi, Executive Director at IFS, who made this known at a roundtable discussion organised yesterday in Accra, said Ghana’s public debt situation had seriously worsened in recent years, adding that the country now faced a high risk of debt distress and increased overall debt vulnerability.

“Total public debt GDP ratio dropped sharply from 113.1% in 2000 to 26.2% in 2006 driven by HIPC and MDRI reliefs. By end-2016, the debt-GDP ratio has risen to 73.3%, and moving towards the ratios recorded in the pre-HIPC period.

“In 2017, interest payment on public debt was equal to 41.8% of total tax revenue. This means that while in 2008, about 16 pesewas of each GH?1.0 tax collected by the government was used to pay interest on its debt; by 2017 the figure had increased to 42 pesewas due to the astronomical increase in the public debt stock over the period. This suggests that resources have been taken away from several critical sectors of the economy, with serious negative implications for growth and poverty reduction.” Government intends to borrow GH¢10.9 billion this year for its operations.

Debt servicing

Commenting on this, he said total public debt service-to-revenue ratio, including payments on external and domestic debt, had not only assumed a rapidly increasing path but had breached its indicative long term threshold.

“Debt service now absorbs a large part of domestic revenue, leaving the country vulnerable to shocks. Ghana currently finds herself in a debt trap as real interest rates continue to surpass GDP growth rates, forcing the country to continue committing more of its tax revenue to service debts.”

Friendly advice

Recent studies on Ghana’s debt by the institute provided a number of recommendations to help maintain the country’s debt sustainability.

It also advised government to formulate and implement a prudent, effective and sound debt management strategy, balance the choice of financing sources and instruments, engage in responsible borrowing by using borrowed funds to invest in projects that had a high private or social return, and formulate an international debt workout mechanism to address fully the problems posed by the unsustainable public debt and their implications for effective fiscal management.

Interest payment

“The rate of increase in interest payment also has to be looked at critically by the government by ensuring that the rate of debt accumulation is reduced and borrowing be done at low rates.

“A serious reprioritization of government expenditure and the pursuance of a stronger domestic revenue mobilization along with a proper financing mix is also needed to avoid jeopardizing the sustainability of the country’s debt.

“The IFS also fully supports suggestions put forward by other civil society organizations, including the Integrated Social Development Center (ISODEC), the Jubilee Debt Campaign, UK, AFRODAD, SEND Ghana and many analysts such as Jones (2016) to help Ghana avoid a protracted and damaging debt crisis.”

Public debt audit

The IFS urged government to undertake a public debt audit by establishing an independent Debt Audit Commission, made up of domestic and international experts and give it access to all the information needed to undertake the audit, as well as analyze all the terms of loans and their costs and benefits.

“The Debt Audit Commission should also propose new accountability mechanisms for government and lenders to ensure that loans contracted are productively utilized.

“Government should strengthen domestic revenue mobilization by increasing tax revenues from large companies and rich individuals, ceasing the granting of tax waiving, and increasing the capacity of the Ghana Revenue Authority (GRA) to ensure that the existing laws relating to issues such as transfer pricing are fully implemented.”

Furthermore, it said government should consider requesting support from UNCTAD to organize a debt conference with all its creditors, with the aim of discussing and restructuring the country’s debt and agreeing debt burden sharing and cancellation of unjust debts to bring debt payments down to a sustainable level.

Source: Dailyguideafrica.com

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