GHANA’S ECONOMY, which has been described as the fastest-growing in the world, is facing debt sustainability challenges, as the Mahama-led government keeps on contracting more loans to undertake development projects in the country. The high pace of borrowing is returning the country to the Highly Indebted Poor Countries (HIPC) status, which she exited in 2006.
The UK-based leading provider of credit ratings, commentary and research, Fitch Ratings, which blew the cover, noted that interest costs and weaker revenue growth on the back of rising macroeconomic uncertainty has pushed the budget deficit to over 10% of Gross Domestic Product (GDP) – the third consecutive year of double digit budget deficits and above the government’s target of 8.5%.
This, combined with the steep depreciation of the cedi will see debt jump again to 61% of GDP by the end of 2014, from 58.2% at end-2013. Debt servicing costs have also risen steeply, to an estimated 6% of GDP in 2014 from 3.3% of GDP in 2011, adding to the intractable nature of Ghana’s fiscal position, the credit agency added in its latest statement on the country.
The Fitch Ratings warned: “external financing conditions will remain extremely tight over the coming months. Foreigners held 21% of domestic debt at end of year-2013, down from 26% in 2012. Of this, roughly one quarter was due to mature by the end of this month. With some recent actions suggesting foreigners’ unwillingness to rollover existing debt, this could see a further outflow of funds adding to pressure on the cedi”.
“Further stress might arise from Ghanaian banks repaying dollar loans taken out during 2013, and there are potential risks of further dollar outflows if the Bank of Ghana (BoG) were unable to roll over swap facilities and loans. Gross external financing requirements, net of Foreign Direct Investment (FDI), stand at roughly 70% of reserves. Reserves were $4.7bn in March 2014, a fall of $900m over the quarter, and just 2.3 months of current external payments.”
Fitch which placed Ghana’s ‘B’ Issuer Default Ratings (IDR) on Negative Outlook in March 2014, highlighted the deteriorating external and fiscal balances and noting the increasing challenge and cost of financing the deficit. A further deterioration in external finances and an erosion of international reserves that jeopardised external financing capacity are ratings sensitivities.
WINDOW FOR NEW ENTERANCE
In the 24th March 2014 Factsheet of International Monetary Fund (IMF) entitled ‘Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative’, it indicated that Joint IMF-World Bank’s comprehensive approach to debt reduction is designed to ensure that no poor country faces a debt burden it cannot manage.
To date, debt reduction packages under the HIPC Initiative have been approved for 36 countries, 30 of them in Africa, providing US$75 billion in debt-service relief over time. Three additional countries are eligible for HIPC Initiative assistance. But Ghana which is among the 35 Post-Completion-Point Countries would not get any relief package from the Bretton Wood institutions if it goes back to HIPC.
DEBT RELIEF KEY TO POVERTY REDUCTION
The HIPC Initiative was launched in 1996 by the IMF and World Bank, with the aim of ensuring that no poor country faces a debt burden it cannot manage. Since then, the international financial community, including multilateral organizations and governments have worked together to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries.
In 1999, a comprehensive review of the Initiative allowed the Fund to provide faster, deeper, and broader debt relief and strengthened the links between debt relief, poverty reduction, and social policies. In 2005, to help accelerate progress toward the United Nations Millennium Development Goals (MDGs), the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI).
The MDRI allows for 100 percent relief on eligible debts by three multilateral institutions—the IMF, the World Bank, and the African Development Fund (AfDF)—for countries completing the HIPC Initiative process. In 2007, the Inter-American Development Bank (IaDB) also decided to provide additional (beyond HIPC) debt relief to the five HIPCs in the Western Hemisphere.