Ghana’s public debt in 2020 rose by GHc55.6 billion during the first nine months of this year which interestingly isn’t surprising. Mainly due to the cost involved in mitigating the dire effect of the COVID-19 pandemic.
Ghana’s Debt Position
In an interview monitored by Ghana Talks Business, Ghana’s debt position has hit a total of GHc273.8 billion as at the end of September. This places Ghana’s debt to GDP ratio at 71.0%. The threshold has crossed the sustainability mark for the first time since December 2016 when the figure stood at 73.3%. An insight into the debt position reveals GH¢135.3 billion of the debt was acquired locally representing 35.1% of GDP while GH¢138.5% of the debt was acquired on the international front.
Government in its efforts in fighting the pandemic and its associated effects left is left saddled with a debt position of 9.0% of GDP fiscal deficit for the first nine months of 2020, as it pushes to keep the whole year deficit within the revised target of 11.8%. This may, however, prove difficult, because of increased spending during election year.
According to an economist with Databank, Courage Martey, in the same interview, Ghana could end the year at a 74% Debt-to-GDP ratio if debt accumulation isn’t slowed down.
“At the rate we are going, we might just hit 74% Debt-to-GDP ratio by the end of 2020, and that doesn’t make for a comfortable outlook at all. For me, the big issue is that, if you look at the growth in the debt stock year-on-year, you will realize that debt stock has increased by 31 percent year-on-year. Now you need revenue to service your debt obligations, but if you look at your revenue growth analysis, on a year-on-year basis we can see our revenue has declined by 1.3 % for obvious reasons,” he said.
“This tells you that while our debt obligation has increased, our capacity to service this debt has weakened, because of the decline in revenue. And this is a significant threat to debt sustainability and on this count for me, is where we have to be very cautious and slow down the rate of debt accumulation,” he further added.
Ghana’s debt position – What does the rising debt mean?
Although public debt tends to serve as an economic stimulus, that is, helping the government to fund expensive projects such as road construction, factories, and plants for raw material processing, rising public debt can lead the country into a deep financial crisis.
All other things being equal, a continuous rise in debt will at some point cause investors to lose confidence in the government’s ability to pay back borrowed money. Investors would thus demand higher interest rates on the debt which would reduce the market value of outstanding government bonds, causing losses for investors and possibly deepen a much wider financial crisis by creating losses for pension funds, mutual funds, banks, insurance companies among others.
Moreover, high-interest rates mean higher borrowing costs for firms and households. The high borrowing costs reduce disposable income which limits growth in consumer spending as well as a lack of funds for business expansion.
Government interest in debt also increases which could lead to higher tax rates in the future. This has the resultant effect of plunging the country into a recession as was the case when Ghana joined the International Monetary Fund’s Heavily Indebted Poor Country (HIPC) programme for poor countries back in 2001.
The programme allowed cash strapped economies limited debt relief, which was ploughed back into poverty reduction programmes. At the time, the country was said to have its foreign debt at $7.5 billion which was far more than its entire annual gross domestic product.