Computations done by the Institute for Fiscal Studies, using data released during the mid-year budget review for 2019 reveals a harsh truth – Ghana has a severe public debt crisis. Successive political administrations in Ghana have been at great pains to mask this unpalatable truth from their own citizenry, primarily to justify further public debt expansion which in turn satisfies political exigencies.
However, the hard truth is that this year more than half of Ghana’s public revenues- 51.2 percent to be precise – will go into debt servicing, interest payments and principal repayments falling due inclusive. What is left is expected to finance government’s ambitious social interventions, economic expansion and industrialization initiatives, and a growing bureaucracy, even as capital expenditure on socio-economic infrastructure continues to dwindle in actual terms, albeit not on paper.
Ghana’s dire public debt situation has been hidden by a combination of dubious fiscal reporting strategies. The primary one has been the use of the public debt to Gross Domestic Product ratio as the way in which Ghana’s public debt sustainability is assessed. This is akin to a household that borrows from the bank using the value of its household and other properties to measure its indebtedness, rather than the collective incomes of that household’s members. But common sense indicates that this measure is only useful to the creditor, in assessing whether it can recover its loan, if there is a payment default; for the debtor what matters is the impact on loan servicing on its incomes. The latter is what reveals that Ghana is using more than half of its revenues to service its debts.
Even the misleading use of the public debt to GDP ratio has been doctored to derive overly comforting results. It should be recalled that during the early part of this decade, Ghana’s public debt analysts used a 60 percent threshold for measuring sustainability. This was curiously raised to 70 percent when the 60 percent threshold was breached just before the middle of the decade. At that time Ghana was already using 42 percent of its revenues to service its debts but no one was taking notice. More recently, the rebasing of the economy was used to reduce the ratio below the 70 percent threshold – which had also been breached by that time – down to a little above 50 percent. This was accepted without considering that the rebasing had not increased public revenues – and thus Ghana’s ability to service its debts – in any way.
The simple truth is that debt servicing is crowding out too many priorities public expenditure needs already and with the way Ghana is self-deceitfully measuring its debt situation, the situation stands to worsen further.
Unfortunately, the very nature of politics in Ghana ensures this. A sharp reduction in public expenditure would cost any incumbent government its position at the next general elections as the same political opposition that is harping about too much borrowing would convince the electorate that government is not doing enough for the citizenry.
Thus, the strategy employed by each successive administration is to keep expanding the debt, using the prospect of increased oil production and consequent revenues to secure more loan finance. Since each administration has a maximum of eight years tenure in office, but can now borrow for between 10 and 30 years, repayments of current borrowing will be some else’s problem.
To be sure, oil production and consequent revenues will increase significantly going forward, giving Ghana the resources to pay down its debts eventually. However, in the meantime current debt servicing requirements will increasingly crowd out public spending to the detriment of the nation’s citizenry.