Saturday, 17 March 2018

Poverty gap to widen - IFS raises alarm

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Adnan Adams Mohammed

The Institute of Fiscal Studies (IFS) has warned of possible widening of poverty gap in the country and a failure to meet the Sustainable Development Goals targets.

This is due to Ghana’s rising public debt which puts the country at the risk of falling back into an extended debt trap, with economic stagnation, according to the IFS.

Executive Director at IFS, Prof Newman Kwadwo Kusi, at a roundtable discussion in Accra, said Ghana’s public debt situation had seriously worsened in recent years, adding that the country now faced a high risk of debt distress and increased overall debt vulnerability.

“Total public debt to GDP ratio dropped sharply from 113.1% in 2000 to 26.2% in 2006 driven by HIPC and MDRI reliefs. By end-2016, the debt-GDP ratio has risen to 73.3%, and moving towards the ratios recorded in the pre-HIPC period.

“In 2017, interest payment on public debt was equal to 41.8% of total tax revenue. This means that while in 2008, about 16 pesewas of each GHc1.0 tax collected by the government was used to pay interest on its debt; by 2017 the figure had increased to GHC0.42 due to the astronomical increase in the public debt stock over the period. This suggests that resources have been taken away from several critical sectors of the economy, with serious negative implications for growth and poverty reduction.”

 Government intends to borrow GH¢10.9 billion this year for its operations.

Also, total public debt service-to-revenue ratio, including payments on external and domestic debt, had not only assumed a rapidly increasing path but had breached its indicative long term threshold.

“Debt service now absorbs a large part of domestic revenue, leaving the country vulnerable to shocks. Ghana currently finds herself in a debt trap as real interest rates continue to surpass GDP growth rates, forcing the country to continue committing more of its tax revenue to service debts,” Prof Kusi expressed.

Meanwhile, the institute has provided a number of recommendations to help maintain the country’s debt sustainability.

It advised government to formulate and implement a prudent, effective and sound debt management strategy, balance the choice of financing sources and instruments, engage in responsible borrowing by using borrowed funds to invest in projects that had a high private or social return, and formulate an international debt workout mechanism to address fully the problems posed by the unsustainable public debt and their implications for effective fiscal management.

“The rate of increase in interest payment also has to be looked at critically by the government by ensuring that the rate of debt accumulation is reduced and borrowing be done at low rates.

“A serious reprioritization of government expenditure and the pursuance of a stronger domestic revenue mobilization along with a proper financing mix is also needed to avoid jeopardizing the sustainability of the country’s debt.

“The IFS also fully supports suggestions put forward by other civil society organizations, including the Integrated Social Development Center (ISODEC), the Jubilee Debt Campaign, UK, AFRODAD, SEND Ghana and many analysts such as Jones (2016) to help Ghana avoid a protracted and damaging debt crisis.”

The IFS urged government to undertake a public debt audit by establishing an independent Debt Audit Commission, made up of domestic and international experts and give it access to all the information needed to undertake the audit, as well as analyze all the terms of loans and their costs and benefits.

“The Debt Audit Commission should also propose new accountability mechanisms for government and lenders to ensure that loans contracted are productively utilized.

“Government should strengthen domestic revenue mobilization by increasing tax revenues from large companies and rich individuals, ceasing the granting of tax waiving, and increasing the capacity of the Ghana Revenue Authority (GRA) to ensure that the existing laws relating to issues such as transfer pricing are fully implemented.”

Furthermore, it said government should consider requesting support from UNCTAD to organize a debt conference with all its creditors, with the aim of discussing and restructuring the country’s debt and agreeing debt burden sharing and cancellation of unjust debts to bring debt payments down to a sustainable level.

Meanwhile, Dr Johnson Asiama, a former Second Deputy Governor of the Central Bank, advised government to put in place a national risk management framework that will help contain the types of exogenous shocks that often rob the economy of gains recorded.

Speaking as a panelist at the roundtable discussion on the topic, ‘Ghana’s growing public debt: implications for the economy’, Dr Asiama noted: “We should have a risk management framework. We expect the growth acceleration this year on the back of oil and what have you. It’s good news. The macro-economy numbers from last year were very good and the finance minister has made that clear.

“However, down the road, just let the rains be late up to August and you will see the story will change. Just have commodity prices take another turn and you will see the story changing. So what am I saying? The story is good but for the sake of longer term debt sustainability, if we can have a risk matrix, a matrix of all the things that affect us as a country. So that continuously, we are building the necessary mitigating measures putting these things in place.”

Dr Asiama also noted: “Exchange rate depreciation impacts on debt accumulation tremendously. And now exchange rate depreciation is in turn impacted by a number of exogenous shocks. You notice that any time those shocks come in, the cedi wobbles. And so going forward, one of the strategies you want to, as part of the strategy is how you can keep down excessive exchange rate depreciation.”

He said given the significant proportion of external debt to the stock, we should be having some kind of interest rate hedging in place. I know there is some hedging going on. We should be having some of that.”

“It is true that our reserves have gone up but you see if you take our entire liabilities as a country and you benchmark that with the level of reserves then you will see that the story is not exactly as buoyant as you would want it to be. To put it into context, if you cast your mind back to the Asian financial crisis time, most of those countries had in excess of six months of import cover and yet when crisis came, it was not enough. So when you are at four months or so, it is good enough but it should actually be a lot better.

“Let’s have a list of all these factors that are able to suddenly change the game. You know, prospect for another energy shock, and you will agree with me that this is not far-fetched. What can go wrong? Let it rain continuously for one week, it happens in Sierra Leone and so can happen here, and you will see what I am talking about. It starts as an exogenous shock, and works its way into a macro-economic shock, then the fiscal is always where it ends up. Each day, let us be convinced that we have each of these well covered and that’s the only way we can assure our longer term sustainability prospect.”

According to him, if such measures are not adhered to, any gains registered would be reduced to nothing should any shock rear its head.