Interest payments shoot up by 330% in 4yrs

Business News of Tuesday, 15 December 2015

Source: B&FT

2015-12-15

Interest payments on government’s borrowing is rising astronomically, and come next year the GH¢10.5billion expected to be paid will mean that the monies spent on interest payments will have grown by 330 percent in the past four years alone.

Barely four years ago government paid GH¢2.44billion or 3.2 percent of GDP as interest payment, but that figure is expected to more than triple in less than five years as government has budgeted GH¢10.5billion — equivalent to 6.6 percent of GDP.

A paper published by the economic think-tank Institute for Fiscal Studies (IFS), titled ‘Ghana: Implications of the Rising Interest Costs to Government’, stated that the cost of interest payments on government borrowing is now higher than capital expenditure, threatening to equal or even overtake wages and salaries if public borrowing is not slowed down.

The paper released last Friday said interest payments have become a major factor behind the country’s fiscal deterioration besides wages and salaries, a situation which the IFS said requires urgent attention.

In 2009-2010, interest payments accounted for an average of 18.4 percent of domestic revenue. This figure dropped to an average of 14.8 percent in 2011-2012, but rose to 30.3 percent in 2014-2015.

In 2016, interest payments are projected to absorb 28.8 percent of total domestic revenue, which means that for every GH¢1 to be collected as domestic revenue GH¢0.29 will go into interest payment, leaving the rest for other recurrent expenditures including wages and salaries, other statutory demands such as transfers to government units, and the much-needed capital expenditure.

According to the IFS: “In fact, the 6.2 percent of GDP interest payments in 2014, the projected 7.0 percent in 2015, and 6.6 percent in 2016 will be three successive years since 2000 that total interest payments will be larger than total capital expenditure”.

A recent statement from credit ratings agency Fitch revealed that this country’s interest burden is the highest amongst its rated sub-Saharan African countries, while other analysts describe as worrying the escalating interest on the country’s debts.

The rise in interest costs over recent years have been attributed to the large budget deficits registered over the years, especially since 2012, which were financed by borrowed funds from both domestic and foreign sources at high interest rates.

To slow down interest costs to government, the IFS said, it will require a slowdown in government borrowing unless such debts are used to finance projects that can generate income within a reasonable period to pay them off. The decision to implement interest rate hedging to allow for enhanced predictability of debt-service is long overdue, the think-tank said.

“Government will need to adopt a debt management strategy that puts caps on the level of gross concessional and non-concessional borrowing. Limits should also be placed on contracting and/or guaranteeing non-concessional loans that can become liabilities to government.

“To effectively monitor the public debt stance, strict measures and quantitative targets will have to be set to guide the efficient delivery of cash and debt management, suggesting that the plan to review and strengthen the Financial Administration Law and the accompanying Regulations is in order,” the IFS said.

Government ought to explore the possibilities of hedging risks associated with borrowing in foreign currencies as the international derivative markets continue to grow in sophistication.

“Government may consider using the interest rate swap-market to manage the country’s external debt maturity structure. Lowering currency risk does not preclude the country from tapping international markets to broaden its investor base, lengthen the maturity profiles, or develop benchmark debt instruments.

“Rather, it implies that unless the government has access to foreign currency revenues, the country’s foreign currency borrowing should, as far as possible, be hedged against currency risks to stop interest costs from rising,” the paper said.