Bonds must finance productive ventures to grow GDP — Prof. Quartey
As the country’s debt to GDP ratio reaches unsustainable levels — 69.8 percent, Head of the Economics Department at the University of Ghana, Prof. Peter Quartey, has said that any bond government intends to raise must be used to finance productive ventures that will pay back to boost GDP.
His comments come on the back of news that government plans to sell a GH¢750million seven-year domestic bond next week, and to borrow a total GH¢11.32billion locally during the second quarter of the year – of which GH¢8.74billion will be used to roll over maturing debt.
Government has also obtained parliamentary approval to issue up to US$2.5billion of sovereign debt, including a US$1billion Eurobond by end of this month.
"If this trend continues without ensuring that investments are made in areas that will yield returns, it will have negative repercussions on the economy", Prof. Quartey told B&FT in an interview.
“The debt level has reached unsustainable levels and we have to be cautious. But then, we have to balance that against the need to ensure development to meet some expectations of Ghanaians. So, in trying to strike that balance, if there is a revenue shortfall and therefore you are unable to finance development expenditures through domestic revenue, then you have to borrow.
“Then, when you borrow it must finance productive activities that will yield returns. In so doing, you also grow your GDP so that your debt to GDP ratio won’t be too bad. So, for me, it depends on what activity the bond is going to finance,” he said.
“Secondly, when you borrow from the domestic economy you are crowding out private investment because government is a secure borrower compared to the private sector, and this doesn’t augur well for private sector development.”
Figures released by the Bank of Ghana last month show that the country’s debt to GDP ratio has reached 69.8 percent, 0.2 percent shy of the 70 percent threshold for developing economies.
In cash terms, the public debt reached GH¢142billion as of December 2017. The domestic component of the debt stood at GH¢66.7billion, while the foreign debt stock was at GH¢75.8billion.
Against this background, Prof. Quartey urged government to hasten implementation of the national identification system so that the informal sector can be roped into the tax net to boost domestic revenue.
“The most optimal approach will be to raise more revenue domestically. One thing that can help is the national identification system. When that is done and we are able to identify the informal sector and rope them in, we can broaden the tax base.
“Raising money through bonds should only be a short-term measure. We should rely more on raising revenue domestically so that government does not compete with the private sector for loanable funds,” he said.