Ghana to default on debt service obligations in 18 months – Ato Forson makes bold prediction
Ranking Member of the Finance Committee in Parliament, Cassiel Ato Forson, has made a bold prediction asserting that Ghana in the next 18 months will default on its debt service obligations to creditors.
According to the Ranking Member, Ghana’s inability to meet its debt service obligations by February 2023, will be inevitable should government continue to disregard advice and not take advantage of the Debt Service Suspension Initiative (DSSI) instituted by the Group of 20 (G20) and supported by the International Monetary Fund and the World Bank.
Making the assertion at the a policy dialogue forum on Ghana’s economy held by the Minority in Parliament on Monday, July 26, the former Deputy Finance Minister noted that given the country’s inability to raise enough tax revenues to service existing debt obligations coupled with increasing debt accumulation, Ghana will default on its debt obligations which will plunge the country into a deeper economic crisis.
Ghana’s debt sustainability situation portrays a worrying picture and this should be of great concern to Ghanaians. Comparing the debt sustainability indicators in 2021 to 2001 when Ghana was declared HIPC, it is clear the 2020 indicators are worse than those in the year 2001 even though the debt to GDP indicator shows an improvement.
We expect government to seek an urgent debt relief from the IMF through the newly proposed debt relief initiative know as the Debt Service Suspension Initiative (DSSI) which can be linked to HIPC. it’s important to do that, we submit that failure to do so as recommended will mean that within 18 months from today, Ghana will be exposed to a high risk of default on its debt service obligations which will plunge the country into a deeper economic crisis.
Government should not wait until disaster strikes, because if we default on our debt service obligations before taking the necessary steps, this will weaken our ability to negotiate favourably for loans.
18 months from today will be in February 2023 and evidence points to the fact that if the status quo remains the same, Ghana’s public debt will be 85 percent of GDP, tax revenues, domestic revenue and total revenues as a ratio to debt will deteriorate, Ghana will not be attractive to the bond market and even to the domestic market, the cost of paying our debts even with term loans will deteriorate and we will use a chunk of our tax revenues to repay our debts, and this will not be good for our country.
Must Read: BoG maintains policy rate at 13.5%
The former Deputy Minister speaking on the debt sustainability situation of the country, among other things spoke about the use of 5.4 times of total domestic revenues and 657 percent of tax revenues to repay the country’s debt stock.
As at the time former President Mahama was leaving office, we used 3.8 times our domestic revenue to repay debt, but President Akufo-Addo has increased it to 5.4 times. Tax revenues as a ratio to public debt increased from 495 percent in 2016 to 657 percent in 2020, meaning Ghana’s total debt was six and half times it’s tax revenues.
In 2019, 51.18 percent of domestic revenue was used to service debts, that increased to 54.2 percent by end December 2019 and then to 71.7 percent of domestic revenue in 2020. Tax revenues for debt service as at end 2016 was about 66 percent, it worsened to 73 percent by 2019 before Covid and further worsened to 87 percent by December 2020. This means that government had only and 13 percent of total tax revenues to run the country.
Also, at the end of 2013, debt service was about 4.2 percent of GDP, but the ratio increased to 7.5 percent in 2016, and then before Covid to 8.8 percent in 2019. By end-2020, debt service had increased to 10 percent of GDP. With regards to interest payments, interest payment on debt was 25 percent of domestic revenue in 2013, 36.6 percent in 2016 and then 46 percent in 2020. Also, Interest payments as a ratio of tax revenues in 2016 was 45.7 percent, and then 55 percent in 2020.
The DSSI is a policy that allows bilateral and multilateral creditors, in a limited period, suspend debt service payments for developing and lower-middle-income countries.
It is also to help countries concentrate their resources on fighting the pandemic and safeguarding the lives and livelihoods of millions of the most vulnerable people.
Presently, about 30 Sub Saharan African nations including Kenya, Ivory Coast, Togo and Ethiopia are on the programme giving them some temporary suspension of debt-service payments owed to their official creditors.
Also: Value of MoMo transactions surge by Ghs 22 billion in first half of 2021
The implementation of the DSSI was complemented by a record disbursement of $19 billion from the World Bank’s IDA from April through December 2020, with a significant share provided on grant terms.
Over this period, the World Bank was the biggest provider of positive net flows to DSSI countries.
Meanwhile, the DSSI instituted by the Group of Twenty (G20) has been further extended to the end of 2021.
The extension of the DSSI initiative was agreed on by the G20, the International Monetary Fund (IMF) and the World Bank at the IMF/World Bank 2021 Spring Meetings held in April this year.
Presently, Ghana’s total debt stock stands at Ghs 332 billion representing 76.4 percent of Gross Domestic Product (GDP).
