There’s growing uncertainty surrounding the country’s increasing total public debt stock, and the Institute for Fiscal Studies (IFS) says government will have to raise as much as US$21.2billion in the next five years to settle its domestic and external debts.
The Executive Director of the Institute for Fiscal Studies (IFS), Prof. Newman Kusi, said the projection of how much the country will need to service its debt is made based on the assumption of no roll-overs and refinancing.
Prof. Kusi, speaking at a forum organised by the IFS and the Natural Resource Governance Institute (NGRI) to make inputs into the 2016 budget, said the public debt which stood at GH¢94.5billion as at June is rising at an astronomic rate --having already crossed the debt-GDP sustainability threshold of 70 percent -- posing serious barriers to economic growth.
The rising public debt comes with its attendant problems of high interest payments, with government budgeting to pay GH¢9.5billion as interest payments for this year alone; an amount that is about a quarter of government’s total expenditure.
The country’s total debt is concentrated at the short-term end of the market, a situation that puts pressure on the budget due to the high rate as well as cost of refinancing.
According to a World Bank report published this year, repayment of short-term domestic debt has reached the equivalent of 31 percent of the country’s GDP.
“The debt composition has become a major source of risk, trapping the authorities in a vicious circle of short maturity high-risk currency depreciation high-debt levels. “This underscores the call for government to slow down borrowing, especially borrowing from foreign sources, unless the borrowed funds are used to finance projects that can generate funds within a reasonable time period to pay off the debt,” Prof. Kusi added
Already government, in issuing the US$1billion Eurobond, has said its debt sustainability strategy includes lengthening the maturity profile of the public debt stock by actively increasing the share of longer-duration foreign debt in the portfolio.
But Prof. Kusi said the new strategy, however laudable, comes at a price. The country’s third Eurobond in as many years came at a coupon rate of 10.75 percent -- a rate that is in excess of the 8.125 percent paid on the 2014 bond, though the two have varying maturity profiles (10 and 15 years respectively). “…It also needs to be recognised that the current financing conditions of the international market have become tighter and more costly for the country. The expected hike in the value of the US dollar and interest rates have made it more costly to borrow from the foreign capital markets, especially as the country’s currency continues to depreciate against the dollar,” he added.
Prof. Kusi’s caution comes in the wake of Finance Minister Seth Terkper’s revelation that government could seek an additional US$500million from the Eurobond market, given the right market conditions, by close of year.
Initially government received Parliamentary approval to raise US$1.5bn from the market, but could only raise a billion -- attributing its inability to raise the full amount to “unfavourable market conditions”. But the IFS Executive Director told the forum attended by government officials, personnel from civil society organisations among others, that the country’s “high level of debt, interest costs and continued borrowing may have serious negative impacts on the country’s sovereign credit rating and impair its ability to service the debt”.
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