Debt-to-GDP Ratio to Drop to 40% in 14yrs - IFS

It will take up to the year 2035 for Ghana’s debt-to-GDP ratio to decline to 40.3 per cent and become sustainable, the Institute for Fiscal Studies (IFS) has stated.

In a recent economic research paper, the IFS said the country’s public debt as a ratio of GDP will peak at 78.3 per cent in 2016 and thereafter drop gradually to 59.5 percent in 2020.

A sustainable debt is one that has a ratio to GDP of 60 per cent or less but Ghana’s debt-to-GDP ratio is hovering around 72 per cent.

Debt-service-to revenue ratio is also projected to be as high as 77 percent in 2016 and estimated to drop to 38 per cent by 2035.

The projections according to the economic think tank are based on real GDP growth, fiscal balance, inflation, exchange rate and interest rates.

IFS said the upward revisions to the public debt to GDP ratio are appropriate and clearly show a much worse debt profile than originally envisaged. This is as a result of more borrowing along with lower real GDP growth.

Ghana’s development partners have repeatedly impressed upon government to strengthen its debt management strategies. The World Bank, the International Monetary Fund (IMF) and other Think-Tanks have stressed that sticking to the fiscal consolidation path and achieving an appropriate financing mix will be key to ensuring debt sustainability.

Public debt to GDP ratio has been reviewed by the IMF to reach 72.4 per cent in 2016 and 69.6 percent by 2017.

Ghana’s public debt  has risen sharply in recent years a s a result of borrowing to finance high fiscal deficits, prompting the IFS and other such bodies to express serious concerns about the country’s debt dynamics.

As of the end of 2015, the debt was reported to have reached GH¢99.9 billion, about 71 percent of GDP.

Generally, advanced countries can carry higher debts sustainably compared with developing countries because they have a greater resource-capacity to service the debt. For the euro-zone, a reference value of 60 percent   of GDP is set for members’ debt.

If this is taken to be the sustainable threshold for the euro area, less developed countries including Ghana would have lower thresholds’. Therefore, Ghana’s debt-to-GDP ratio which was reported to be around 71 percent in 2015could be said to have crossed the sustainable threshold.

On the risks to the current IMF bailout program, IFS said the government faces tight financing conditions both externally and internally.

Externally, the deterioration in Ghana’s domestic economic situation has led to downgrading of Ghana’s sovereign ratings by credit ratings agencies implying that Ghana can only borrow at very high cost. The issuance of a US$1 billion out of a planned US$1.5 billion Eurobond late last year attracted a high yield of 10.75 percent and attests to the low investor appetite for Ghana’s debt.

Internally, interest rates are prohibitively high, implying that government can only borrow at a high cost.

 Earlier this year, forecast from the Economist Intelligence Unit (EIU) revealed that Ghana’s debt-to-GDP ratio will hit 75.8 per cent by the end of 2016 with a nominal Gross Domestic Product (GDP) of GH¢166.9billion up from GH¢139.9billion in 2015.

This means the country’s total public debt stock will hit GH¢126.6 billion by the end of this year. Further, the EIU is estimating a lower real GDP growth rate of 3.6 per cent, from the 5.2 per cent (non-oil) target in the 2016 budget.