Debt servicing putting pressure on cedi

Rising public debt servicing requirements are nullifying Ghana’s sustained foreign merchandise trade surplus and putting pressure on the cedi, latest data from the Bank of Ghana indicates. While the rate of accumulation of public debt has slowed considerably since 2017, government’s debt is still rising in absolute terms on top of an already inordinately high level as at that time. But just as importantly, foreign exchange obligations arising from debt servicing and amortization has risen considerably this year on the back of increased cedi denominated debt taken [and consequently serviced and repaid] in foreign exchange as well as early exits by foreign investors from such debt in response to rising interest rates in bigger western hemisphere economies brought about by hikes in federal fund rates by America’s Federal Reserve Bank.

The latest data released indicates that although Ghana recorded a 1.407 billion dollar trade surplus for the first eight months of 2018, translating to 2.7% of Gross Domestic Product, the current account deficit for the first half of the year rose to 301 million dollars [0.6% of GDP] up from 181 million [0.4% of GDP] for the first half of 2017. Combined with the relatively lower capital and financial account out turn brought about by rising foreign exchange requirements for debt servicing this led to a balance of payments deficit of 371.6 million dollars for the first half of 2018, a reversal of the 1.2 billion surplus recorded in the corresponding period of last year.

This, added to foreign reserve draw downs by the BoG aimed at reassuring nervous local forex markets has lowered Ghana’s gross international reserves from 7.6 billion dollars as at the end of 2017, enough for 4.3 months of import cover to 6.7 billion dollars, enough for just 3.6 months of import cover by September 20 this year.

The effect of Ghana’s debt servicing obligations in forex is being masked by two things. Firstly, both government itself and economists tend to use the debt to GDP ratio to measure Ghana’s debt performance. By this score, the situation has improved over the past one year, from 67.4% as mid 2017 to 65.9% as at end of June 2018. But it is the cost of debt servicing on government’s net revenues that really matters for macro-economic managers and this is on the rise, now approaching 45% of tax revenues, up from an already debilitating 42% last year.

Here, Ghana is now paying the price for the series of Eurobond issues, done annually between 2013 and 2016, and to a lesser extent, the record two billion dollar issuance done earlier this year.

Secondly is the fact that Ghana’s biggest and longest tenured domestic debt securities issuances are now being subscribed by foreign investors in forex, but serviced and amortized in forex too. Thus official data which puts external debt at 18.2 billion dollars and domestic debt at 17 billion dollars as at July 2018 [making for a total of 33.9 billion which itself is up significantly from 31.5 billion a year earlier] substantially understates the associated forex obligations which, in actual fact, now account for some three fifths of total debt servicing obligations The most notable example here is the unnecessarily controversial bond issuance of the cedi equivalent of 2.25 billion dollars, done in April 7; while it is classified as domestic debt it is being serviced and will ultimately be amortized in forex.

The rising current account and capital account deficits have nullified the trade surplus and indicates that government has less forex than it needs and this is affecting forex traders perception of the strength of the cedi, which has consequently depreciated by 7.3% since the beginning of the year, as compared with 4.7% during the corresponding period of 2017.

By Onajite Sefia