Most research has shown that the effects of public debt on economic
growth differs across countries; depends on country-specific factors and
institutions such as the level of fiscal imbalances, the level of debt
sustainability, the level of financial deepening, macroeconomic
stability, and the political environment.
In response to the financial and economic crisis of 2008/09, the
accumulation of public debt and its effects on economic growth have
received renewed attention among many economists and policy makers.
Conventionally, a good measure of the sustainability and accumulation of
a country’s debt is to consider the debt level to the overall economic
output of the country measured by the Gross Domestic Product (known as
the Debt-to-GDP ratio).
Data released by the Bank of Ghana recently showed that Ghana’s debt
stock rose to GHC 97.2billion (or US$25.6billion) in December 2015,
equivalent to 72.9% of GDP.
Out of this, total external debt amounted to GHC57.8billion (43.4% of GDP) and domestic debt was GHC39.4billion (29.5% of GDP).
Hence, based on Ghana Statistical Service population projections as at
the end of 2015, every Ghanaian citizen, including children owe about
GH¢3,512.81 in government debt compared to GHC872.99 as of 2011.
As government runs budget deficits, mainly leading to the rise in the
debt level; servicing the debt comes with severe consequences.
Notwithstanding the methodology, assumptions, and approach, the growing
bulk of research shows that increasing government debt could have a
significant, long-term adverse effect on economic performance.
The contention in the economic literature is the magnitude of the impact of the debt levels on economic growth.
Therefore, the substantial increases in Ghana’s government debt pose a serious risk to the economic security of the country.
A country burdened with an enormous debt means tax increases in the
near-term to finance the debt—consuming most of government revenues and
crowding out investment in priority areas such as education and
healthcare.
As the tax increases persist, it will become increasingly difficult for
the low and middle-class Ghanaian to maintain their standard of living
excluding perhaps, the politicians.
Also, such a country is susceptible to external shocks such as the
global recession and most importantly, the country leaves an obligation
that will pass along to the next generation.
A notable research published in the most prestigious economic journal,
American Economic Review, examined data spanning over 44 countries and
found that across both advanced countries and emerging markets, high
Debt-to-GDP levels are notably associated with lower growth outcomes.
A recent study published by the International Monetary Fund (IMF) argued
that the level of the debt is not much of a concern but rather the
growth of the government debt poses long-run negative consequences on
economic growth.
Similarly, the IMF study found that debt thresholds for developing
countries such as Ghana, ranges from 30% to 60% and that of the advanced
economies are higher ranging from 60% to 80%. Within the last 4 years,
Ghana’s total debt stock rose to GHC97.2billion (72.9% of GDP) as of
2015, up from GHC24billion (42.2% of GDP) as at the end of 2011.
This means government added to the public debt an overwhelming amount of
GHC73billion between 2011 and 2015 representing an average growth rate
of 75% per year.
This represents a momentous proliferation of the public debt over the
past 4 years. As the debt continues higher, the liability of every
Ghanaian is also rising.
The graph below shows the historical debt-to-GDP ratio of some selected
African countries in the Sub-Saharan region over the past 10 years.
As shown in the graph; comparing the Debt-GDP-ratio to the other
selected countries in the sub-region, Ghana has had the highest
Debt-to-GDP ratio over the past 3 years.
Here are reasons Ghanaians must be worried first, just like any other
debt, such as acquiring a loan from the bank or a mortgage, the
government pays interest on the accrued debt. In the 2016 budget
statement, total interest payment was estimated at GH¢10.5 billion,
equivalent to 6.6% of GDP.
The interest payment as a percentage of GDP was 2.8% as at 2009, 4.3% as
at 2014 compared to 6.6% budgeted for in 2016. According to Fitch
Ratings (2015), Ghana’s interest payment burden is the highest amongst
its rated sub-Saharan Africans sovereigns.
Interest payments consume almost one-third of government revenues;
meaning less spending elsewhere which ultimately reduces capital
investment.
A lower debt level means savings on interest payments which could have
been allocated to other areas of the economy, such as healthcare,
transportation, and agriculture.
To put this in perspective, the amount budgeted for interest payment in
the 2016 budget is higher than funds allocated to government units;
comprising statutory payments into the National Health Insurance Fund,
the Ghana Education Trust Fund, the District Assemblies Common Fund,
Road Fund, Petroleum-Related Funds, transfer to the Ghana National
Petroleum Company and retention of internally-generated funds by MDAs
estimated at GHC9.7billion.
Additionally, the budgeted interest payments for 2016 is higher than the
total amount of GHC6.7 billion allocated for capital expenditure in the
country. It is also higher compared to the expected tax proceeds from
domestic goods and services estimated at GHC7.4billion.
Total revenue and grants as a percentage of GDP were estimated at 23.3%
compared to total Debt-to-GDP ratio of 72.9% as at the end of 2015.
The low revenue growth in the era of prolonged weakening economic growth
is also a critical factor in the soaring of government debt.
This relatively showcases the case for unsustainability of the debt
level. The reason is that government has to resort to rapid borrowing in
order to increase its revenue in financing other capital expenditures.
At the end of the day, grants and donations from external bodies,
including taxes paid by Ghanaians meant for critical investment in other
sectors of the economy will be used to service the growing debt.
Wouldn’t it be judicious to see the government spend more on your health
care rather than paying for the debt? Relatively, this gives us a
picture of the displacement effect of the debt level on spending in the
country.
We must be worried! Besides, the banking sector remains the major holder
of the domestic debt. A high accumulation of debt causes interest rates
to rise in the long term. Recently, among the many reasons for which
the credit rating agency, Moody’s Investor Service, downgraded Ghana’s
credit rating to B3 (a very negative outlook) is the high cost of
funding in the domestic market.
The rise in interest rates or the high cost of capital saddling the
private sector partly has to do with the fact that government is
competing with individuals and business for loans at the commercial
banks.
The resulting effect of the rise in interest rate is the reduction of
investment in the private sector. This leads to lower productivity and a
reduction in productive capacity; which in the long-run results in
lower economic growth.
Secondly, as experienced in the tax policies introduced recently,
soaring public debt means there is high tendency for government to
increase taxes in the medium term to finance the debt and its interest
payments.
For instance, an increase in personal income tax means a reduction in
disposable income and savings for Ghanaian taxpayers. This increases the
financial burden of many Ghanaians; reduces consumer spending and thus
hinders economic growth in the long-term.
Higher taxes for businesses reduces productive investment in the private
sector leading to a weaker output, unemployment and the overall
ineffectiveness of the private sector, which is expected to be a key
driver for economic growth.
Moreover, with the dollarization our economy and the fact that the
larger part of the debt is held externally means; depreciation of the
cedi will increase the amount of the external debt without any
corresponding changes in spending or productivity.
A high debt level is also at risk to high-interest rate, low credit
ratings and reduces investors’ confidence in the economy. Also, a rise
in interest rate means an increase in funds to service the debt.
With this, more resources are allocated to servicing the debt distorting
spending priorities of the government. Additionally, the global economy
is in a state of instability, and there is an increasing danger of a
downward spiral. Policy makers must take note that unpredicted global
economic slowdowns can change the fiscal outlook in the country.
For example, when there is a recession, governments are compelled to run
budget deficits as seen after the 2008/09 financial crisis.
If you are already operating a large budget deficit from increased
government expenditure, then it means a rapid build-up in more debt.
With our current Debt- to-GDP ratio hovering above 70% means we are
highly vulnerable to external shocks.
During the July 2015 World Economic Outlook update, Olivier Blanchard,
former chief economist at IMF, said the larger lesson from the Greek
debt crisis is that”…the post-crisis world is a world of high debt. And
it doesn’t take much.
It just takes a bad shock for the dynamics to go wrong. We have seen it
in the case of Greece, but we see it in various places…” Lastly,
although Ghana has faced economic headwinds over the past years, fiscal
policy choices and precisely a lack of spending restraint coupled with
weak revenue growth are responsible for the unprecedented increases in
the public debt.
The sustainability risk of the debt level poses a danger to our future
prosperity. As observed by David Hume, the 18th century Scottish
philosopher and economist, politicians prefer debt to taxes since the
cost are concealed and affects the subsequent generation.
As a result, every incumbency will prefer debt knowing that generations
to come will bear the consequences—our children will pick up the bill
for their financial mess. To change this direction, we will need a
government who is eager to put the needs of the country ahead of their
own agenda.
As policy makers appreciate the need for spending and fiscal stimulus,
it is similarly important to be aware of the potential short and
long-term economic repercussions from accruing debt.
The fiscal policy lesson is obvious: running a deficit to speed up
growth is not a bad idea, but borrowing rapidly to finance spending
comes with a serious opportunity cost. Regrettably, politicians in Ghana
always get away with bad policies.
You know why: the citizenry are inclined to confirming their biases than
pursuing the truth when it comes to holding politicians accountable.
This is holding us back.
As recently stated by Prof. Newman Kwadwo Kusi, the Executive Director,
Institute for Fiscal Studies, Ghana’s Debt-to-GDP ratio has reached a
level considered to be above the sustainability threshold posing serious
headwinds to the macroeconomic stability and development of the
country.
I can’t agree with him more as he argued out that without a
well-grounded fiscal framework toward the achievement of credible
policies to restore the debt sustainability and most important
macroeconomic stability, the country will very soon be on a debt
meltdown like Greece.
I will end by saying “A wise man will hear, and will increase learning;
and a man of understanding shall attain unto wise counsels” (Proverbs
1:5)
Source: Eric Kofi Kontoh
www.ghanaweb.com
