Domestic Borrowing to ease in second half of 2019

Domestic borrowing in this second half of the year is set to moderate, as government’s debt accumulation is expected to slow significantly, compared with the first half of the year.

This has become necessary given the sizeable frontloading of financing requirements in the first half of the year which were funded from the issuance of debt securities on the domestic market as well as a US$3 billion Eurobond issuance, the largest done by Ghana to date.

Government has come under criticism for the rate at which the public debt has grown during the first half of this year, but government has defended itself, insisting that this was part of a deliberate strategy by which most of its deficit financing would be concluded by mid-year to assure the availability of financing for its priority projects and programmes.

The cost of completing the clean-up of the commercial banking industry and the subsequent clean-up of the micro-finance industry has also forced government to accumulate public debt in one-off public spending which consequently is not included in the fiscal deficit computations for 2019 but inevitably has been recorded in the public debt stock.

According to the 2019 mid-year budget review statement, government intends to use proceeds from the monetization of mineral royalties, as well as proceeds from the sale of electromagnetic spectrum and the sale of certain public assets, which should also aid it to reduce the amount of domestic borrowing during the period.

Expectations are that, a World Bank Development Policy Operation (DPO) facility estimated at US$500 million will be approved by Parliament for disbursement in this second half of the year as well.

Financing the revised fiscal deficit of 4.5 percent of Gross Domestic Product for the rest of the year will be balanced using a blend of foreign and domestic financing resources.

For the first quarter of this year, the two subsequent months (April and May), as well as the three-month period June to August, government sought to issue domestic debt securities to the tune of gross amounts of GHc 11,250.00 million, GHc 12,100.00 million and GHc 10,350.00 million respectively, making up a total of GHc 33,100.00 million.

However, the reticence of foreign investors with regards to buying into cedi denominated medium-and long-term debt securities during the first quarter of the year, when sharp cedi depreciation threatened them with significant foreign exchange losses, forced government to increase the proportion of foreign currency denominated debt in its mix relative to cedi denominated domestic debt.

Public Debt

The gross public debt stock in nominal terms stood at GHc 203,890.47 million (US$38,743.3 million) as at end-June 2019, representing 59.19 percent of Gross Domestic Product (GDP).

The increase was mainly as a result of frontloading the financing requirements for 2019 in the first quarter and the cedi equivalent of the relatively larger stock of external debt which has risen in local currency terms due to the 8.4 percent depreciation of the cedi against the dollar during the first half of the year.

Of the total, external debt at end-June 2019 amounted to GHc 107,633.9 million (US$20,452.61 million), whereas domestic debt summed up to GHc 96,256.57 million (US$18,290.69 million), representing 52.8 percent and 47.2 percent of the total public debt stock, respectively.

As a percentage of GDP, external and domestic debt represented 31.25 percent and 27.94 percent, respectively.

Government Debt Strategy

The 2019-2022 Medium Term Debt Strategy (MTDS) envisages an increase in the issuance of medium to long-term bonds on the domestic bond market over the strategy period.

For the first time, the strategy envisages the issuance of a 20-year domestic bond in August 2019. This will be the first time that Ghana is issuing a 20-year bond, and would be the longest tenure domestic bond to date.

This is aimed at diversifying the instrument base and providing suitable options with which institutions like the pension and insurance companies can match their assets to their liabilities.

The strategy also envisions the issuance of a sovereign bond with proceeds to be used for liability management and budget support.