Don’t borrow to pay interest on loans : IMF admonishes Ghana gov’t

The Deputy Managing Director of the International Monetary Fund (IMF), Mr Min Zhu, has cautioned the government against borrowing to pay interest on its loans. The caution comes as interest payment has become a major factor behind the country’s fiscal deterioration, besides wages and salaries, and requires serious attention. In the 2016 Budget, interest payments are estimated at GH¢10.5 billion, equivalent of 28.8 per cent of total domestic revenue expected this year. This means that for every GH¢1 to be collected as domestic revenue, GH¢0.29 would go into interest payments, leaving the rest for other expenditure, including recurrent such as wages and salaries, other statutory demands such as transfers to government units and the much-needed capital expenditure. The interest payment burden is also 57.1 per cent greater than the budgeted capital expenditure, which is at the centre of economic growth and development.
Mr Zhu, in an exclusive interview with Daily Graphic in Accra, said: ‘Now the government has to carefully manage debt sustainability. The key issue we need to make sure [is] they don’t borrow money to pay the interest rate. This means gradually, we need the roughly two per cent primary surplus and 4-5 per cent of Gross Domestic Product (GDP) growth. This way we will be able to stabilise debt and make sure the debt trajectory is on the downside,’ he said The deputy MD paid a two-day working visit to Ghana during which he met with President John Mahama, Vice President Kwesi Amissah-Arthur, ministers of state, captains of industry, some eminent economists and civil society organisations. Mr Zhu delivered a keynote speech at a conference on the value of Enhanced Data for Better Macro-Policies in Africa, where many economies need to improve on their data gathering, publishing and transparency.
The IMF deputy chief said: ‘The debt level is still high, compared with its peers, around 70 per cent of GDP. For all its peers, whether emerging markets or frontier markets, they are around 40-45 per cent.’ ‘So the debt ratio is very high. Debt sustainability is one of the key issues. When you have a high debt ratio, then the market will be concerned. Meanwhile, it will be extremely difficult for you to go back to the market. This is a key challenge,’ he said. Interest costs have risen astronomically in recent years in Ghana due to the large budget deficits registered over the years, especially since 2012, which were financed by borrowed funds from both domestic and foreign sources at high interest rates.
Interest payments accounted for an average of 18.4 per cent of domestic revenue in 2009-2010, dropped to an average of 14.8 per cent in 2011-2012 and rose to an average of 30.3 per cent in 2014-2015.
The government’s borrowing to finance large budget deficits in recent years have been one of the major factors that has caused interest rates in the country to rise significantly, increasing the cost of borrowing. As its borrowing increases, the government has to pay higher interest rates to the holders of its bonds.
In Ghana’s case, increased borrowing by the government has pushed up interest rates because the market fears that there is a high chance of default on the part of the government; therefore, it demands higher interest rates in return for the greater risk.
This concern was reflected in the record coupon rate of 10.75 per cent that the country paid for its US$1 billion Eurobond issued in October 2015, notwithstanding the partial guarantee provided by the World Bank for the debt. Although the bond’s 15-year tenor was lengthier than previous issues, the coupon it attracted was the highest ever paid by a sub-Saharan African country on the international bond market.
Domestically, the high interest rates on government bonds tend to push up other interest rates in the economy, increasing the cost of credit, with negative implications for investment and economic growth.
Many analysts see 2016 as a crucial year for fiscal management, as the government is being looked upon to buck the trend of huge spending overruns that have been associated with past election years and contributed to the current unsustainable and costly debt burden. President Mahama has pledged to maintain a tight grip on the spending purse, but his resolve is being tested in the face of demands by unions for improved salaries and the public backlash against recent tax hikes.

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Posted by on Feb 14 2016. Filed under African News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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