Governor of the Bank of Ghana (BoG), Dr Ernest Addison maintains that Ghana’s public debt stock, which has risen to GH¢200 billion by May 2019, representing 58.1% of GDP, is sustainable.
However, he fears the large foreign investor component makes the economy vulnerable.
Consequently, he called for a shift in the conversation around the country’s debt levels from its stock and quantum to the composition, saying the amount of debt in the hands of non-resident investors showed the level of vulnerability to which the economy has been exposed.
External debt is $20.5 billion (GH¢105 billion)
A summary of the latest economic data published by the central bank showed that as at May this year, out of the total public debt of $38.8 billion (GH¢200 billion), the external debt stood at $20.5 billion (GH¢105 billion).
External debt constitutes 30.6% GDP
This means that the foreign investor component of the debt constitutes 30.6% of Ghana’s Gross Domestic Product (GDP).
Domestic debt amounts to $18.3 billion (GH¢94.6 billion)
On the other hand, the domestic component of the debt amounted to $18.3 billion (GH¢94.6 billion).
Domestic debt represents 27.5% of GDP
According to the data, the domestic debt represents 27.5% of GDP.
Dr Addison, at a Monetary Policy Committee (MPC) press briefing, pointed out that the bank’s assessment of the country’s debt situation was contingent on “very high rates of growth and on some assumptions of interest and exchange rates”.
The role of exchange rate movement
Touching on how the debt shot up by some GH₵2 billion between March and April, 2019, the governor said the development was partly a reflection of exchange rate movements during that period.
According to him, movements in the exchange rate have a telling effect on the debt stock, especially “the dollar value of our external debt”.
Revenue mobilisation challenges
In spite of what it described as a favourable outlook for the Ghanaian economy, the bank expressed worry over persisting challenges in the country’s revenue mobilisation efforts, amidst government’s increasing expenditure.
Dr Addison warned of dire consequences if corrective measures were not taken to address the risks.
“The committee observed that the pace of fiscal consolidation has slowed down, mainly reflecting gaps in revenue mobilisation, while the pace of spending has increased. This could pose risks to macroeconomic stability if not addressed,” Dr Addison stated.
He was, however, hopeful that the mid-year budget review would deal with the challenges.
According to the governor, new measures to be announced by the Finance Minister “should help address the financing gap challenges, as well as manage the risks from the large unbudgeted energy sector-related payments that could adversely impact foreign exchange reserves and undermine the macro stability gains made so far”.
3% Overall budget deficit
Provisional data for the first five months of 2019 showed an overall budget deficit (on cash basis) of 3% of GDP against the target of 2.4% of GDP, according to the bank.
“The higher-than-projected fiscal deficit outturn was primarily driven by lower-than-expected revenues outturn against increased pace of spending,” Dr Addison noted.
Policy rate maintained at 16%
Not oblivious of the threats of fiscal underperformance to macroeconomic stability, but conscious of possible inflationary effect of recent hikes in utility tariffs, among other variables, the bank kept the key lending rate unchanged at 16%.
Inflation remained within the target range for 15 months
Inflation had remained within the target range for some 15 months, and the bank was confident it would not fundamentally shift from its medium-term target, and “this is why we had the courage to leave the policy rate where it is”.
“Although there are risks to growth, mainly from subdued business sentiments and increase in utility tariffs, growth is expected to remain robust in the second half of the year,” the bank noted.
He, however, said while these risks remain, the bank’s core mandate of price stability had been on track.
Inflation had remained within the target band in the last 15 months.
The committee assessed that the pass-through from exchange rate depreciation was waning and the underlying inflationary pressures, as well as inflation expectations, were well-anchored.
Headline inflation has trended downwards since April 2019 after three consecutive price increases on the back of exchange rate pass-through effects.
From 9.5% in April, inflation declined to 9.4% in May, and further to 9.1% in June.
Banking sector has high growth prospects
According to the bank, provisional data available through the year to June 2019 showed that the banking sector was well-capitalised, solvent, liquid and profitable with improved financial soundness indicators.
“At the end of June 2019, banks’ total assets amounted to GH¢112.8 billion, representing an annual growth of 12.5%. The increase in total assets was funded mainly from deposits, which recorded a strong growth of 22.3% year-on-year,” the bank stated.
The banking industry’s Capital Adequacy Ratio (CAR) was estimated at 19.1%, significantly higher than the statutory minimum of 10.0%.
It added that the average industry CAR was 16.3% when computed in accordance with the new Bank of Ghana Capital Requirement Directive (CRD) under the Basel II/III capital framework.
Source: The Finder