‘Debt-To-GDP Ratio Decline Inaccurate’

Seth Terkper, Finance Minister 

The recent declaration in the supplementary budget by the Finance Minister Seth Terkper that the country’s debt-to-GDP ratio has declined has been challenged by the Institute of Fiscal Studies (IFS), which has described the announcement as inaccurate.

“This is because the main reason for the fall in the ratio during the year is the effect of the projected large nominal GDP of GH¢166.8 billion in 2016 used to derive the ratio. The upward revision in the nominal GDP figure to this level itself raises some doubts in view of the fact that the projected real GDP growth for the year has been cut down from 5.4 percent to 4.1 percent, and there has been no revision to projected inflation,” it pointed out.

The economic think-tank also said as more borrowing takes place in the remaining period of the year, the debt-to-GDP ratio will certainly rise, adding that a more substantive reduction in the debt burden could only be achieved if fiscal consolidation continued, the exchange rate was kept stable and economic growth strengthened.

Moreover, the worries about the debt do not only have to do with the ratio to GDP but also the interest spending on the debt. Interest cost to government has risen from GH¢2.4 billion (3.2 percent of GDP) in 2012 to an estimated GH¢10.5 billion (6.3 percent of GDP) in 2016.”

Interest cost

Relative to total government expenditure, it said, interest cost has jumped from 9.6 percent in 2012 to a projected 22.7 percent in 2016.

In addition, whereas traditionally the budget for debt interest has not exceeded the capital budget in Ghana, the reverse has been occurring since 2014.

“In that year, interest cost was 16.2 percent more than capital expenditure. The gap increased to 27.2 percent in 2015 and is estimated to be 64.1 percent in 2016. We do not think this situation is tenable. The need to reduce the public debt burden therefore is also to cut back on debt interest payments which are crowding out public investment and other critical expenditure.”

IFS said the build-up of public debt had been quite rapid in the last four years, with the debt stock growing from GH¢35.1 billion in 2012 to GH¢100.2 billion at the end of 2015 and the debt-to-GDP ratio increasing from 48.4 percent to 71.6 percent in the same period.

“This has stirred up troubling memories of the past when an unsustainable rate of debt accumulation drove the nation to seek debt relief by signing on to the Heavily Indebted Poor Countries (HIPC) initiative.”

Stabilization Fund

It further said the proposal to further lower the cap on the Ghana Stabilization Fund to $100 million was disturbing since it risked undermining the objective for creating the Fund to build savings to cushion the impact on the budget of unanticipated shortfalls in petroleum revenues.

“The continued depletion of the Stabilization Fund, whose closing book value at the end of 2015, was just $177.4 million, weakens its capacity to help sustain critical public expenditure when oil prices decline. It also has the propensity to cause more borrowing by the government to plug revenue shortfalls.”

By Samuel Boadi

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