A Keynote Address by
Hon Isaac Adongo,
MP, Bolgatanga Central Constituency and Member, Finance Committee of Parliament
GHANA DEBT ADVOCACY MEETING
At SunLodge Hotel, Accra
On July 4, 2019.
1. After independence, debt sustainability has been one of the recurrent hurdles that managers of the economy have had to grapple with. To help make up for revenue shortfalls and fund strategic projects, various governments have had to resort to borrowing in an attempt to provide social services to the citizens and grow the economy. On some occasions, these debt build-ups have exceeded the sustainable levels and posed serious threats to the economy.
2. In line with the world economic order, Ghana has been a major beneficiary of global debt sustainability mechanisms in the last two decades aimed, primarily at creating fiscal space for accelerated economic development.
3. In 2001 for instance, the country joined the HIPC and MDR initiatives to obtain reliefs on debt service and repayments in return for structural reforms that were expected to anchor fiscal management and attainment of sustainable debt levels. However, by 2018, debt sustainability analysis by the World Bank and the IMF had categorised Ghana as a country at a high risk of debt distress, having missed four of five debt sustainability thresholds. These are debt-to-exports ratio, debt-to-revenue ratio, debt service-to-exports ratio and debt service-to-revenue ratio, according to the results of the World Bank and IMF Debt Sustainability Analysis published earlier this year.
4. The Parliament of Ghana in the exercise of its oversight responsibility recently received, reviewed and debated Ghana’s Annual Public Debt Management Report for the 2018 Financial Year. The outcome of the adoption of the Finance Committee’s report on Ghana’s public debt and the recent data from the Bank of Ghana as contained in its summary of macroeconomic and financial data has heightened the general discourse about Ghana’s public debt in relation to the funding of critical infrastructural deficits.
It is in the light of these developments and in the search for enduring reforms for Ghana’s fiscal, debt management and the financial sector that the theme for this meeting is both timely and extremely relevant. You could not have chosen a better theme than this: ‘INTERROGATING GHANA’S DEBT MANAGEMENT STRATEGY; LESSONS FOR WEST AND CENTRAL AFRICAN STATES’.
5. Indeed, Ghana’s debt management strategy has evolved over the last decade and continues to be subject to continuous improvement. It is, therefore, of great benefit to Ghana that this debt advocacy meeting seeks to interrogate how we have managed our public debts over the years, the various reforms that have underpinned our debt management strategies and to subject these to what I will call peer review by debt stakeholders for lessons to be drawn.
6. In my keynote address, I will show Ghana’s current debt dynamics and attempt to trace some of the reforms that have significantly impacted Ghana’s public debt management through fiscal reforms, budget development and implementation as well as the linkage with local financial markets developments to improve risks or exposure of public debt to external exigencies.
GROSS PUBLIC DEBT DYNAMICS
7. In recent times, Ghana’s public debt grew to unsustainable levels. Data released by the Ministry of Finance and the Bank of Ghana (BOG) put Ghana’s public debt at an all-time high of GH¢198 billion in March this year.
At 57.8% of DEBT to GDP, Ghana’s debt-to-GDP at the end of 2018 is the highest recorded in the last five years. Interestingly, Ghana recorded a debt-to-GDP achieved in the whole of 2018 in just 3 months of 2019. This is incredible. With a significant part of the budget still to be financed and Government in default of meeting its statutory obligation to GETFUND, this will only get worse.
8. Ghana recorded a high rate of debt accumulation in 2014 at 50%. This was the outcome of the external shocks to the economy which originated from the drastic fall in the world commodity prices such as crude oil, cocoa and minerals (Gold Bauxite etc). By 2016, however, this had slowed significantly by about 28% to 22% rate of accumulation and further to 18% in 2017. Unfortunately, we are beginning to experience a reversal in the face of the favourable global environment that has resulted in high levels of world commodity prices and a tripling of oil and gas output and associated petroleum revenues. Ghana’s debt accumulation ratio increased from 18% in 2017 to 21.8% in 2018. What is worrying is the fact that Ghana has already accumulated as high as 14.5% of public debt in just three months of 2019.
9. Beyond the quantum of debt and the rate of accumulation, the composition of Ghana’s debt holdings also poses eminent risks to the balance of payments and external vulnerability. As a sign of failure of Ghana’s monetary policy and weak development of financial markets to support domestic financial resource mobilisation to fund the annual budget, Ghana’s economy continues to be at the mercy of external investors. The table below shows the challenging forex component of Ghana’s debt.
10. By the end of 2018, foreign investors held 30% of our domestic bonds. In addition to our external debt portfolio, about 64.88% of Ghana’s entire public debt was in the hands of foreign investors as at the end of 2018. Within three months of 2019, this had worsened to 67.17%. As a matter of fact, Ghana currently has the highest external holding of domestic bond in any country in Africa. This means that our economy is the most vulnerable to foreign investor sentiments in Africa. The sad reality, however, is that the Government does not seem to appreciate the risk this pose to our economy. Instead, they misconstrue it to mean increased confidence in the economy and go about taking decisions without due regard to the foreign investor sentiments. I was not therefore surprised when the Governor of the Bank of Ghana on April 1 said that the bank does not take decisions to please foreign investors but to satisfy the demands of the domestic investor. This shocking revelation by no mean a person than the Governor of a central bank who has more than 67% of his country’s debts in the hands of foreign investors do not only reflect the lack of appreciation of the risks posed to the economy but the quagmire we find ourselves in.
11. Ghana has one of the highest debt service costs in Africa. The country spent over $4 billion on debt service between 2017 and 2018. This is equivalent to 80% of the entire $5 billion Eurobonds issued in 2018 and 2019. This is incredible. Between 2017 and 2018, Ghana spent about 42% of its tax revenue on debt service each year. By the end of March 2019, Ghana began to now borrow to pay for debt service as the primary balance began to show a negative balance (we will need to source this).
Rising Broad View of Debt Stock
12. Ghana’s public debt statistics as reported by the Bank of Ghana represent just the narrow view of gross public debt and does not reflect the entire debt stock of Ghana that is taken into account in calculating debt sustainability of the country. It is instructive to note that Ministries, Departments, Agencies and SOEs are sitting on a mountain of public debt that has long term implications for fiscal risks and debt sustainability. The broad view of the debt stock is now worsening by the continuous creation of mounting fiscal pressures that impose significant encumbrances, inflexibility and non-discretionary bottlenecks in the management of the economy. These ranges from fiscal rigidities to securitisation of future revenue flows that impact debt management by creating layers of seniorisation of public debts. This means that while the government would have no discretion in the use of those flows, the economy would be significantly exposed to vulnerability and debt service difficulties if future flows are hit by economic circumstances. This is tantamount to suffocating the economy.
Recognizing the impact of these on public debt and fiscal space, the IMF said in its 7th and 8th reviews, and I quote;
‘Directors urged the authorities to limit debt collateralization and revenue monetization to avoid encumbering revenues and creating seniority among creditors. They recommended caution with the planned financing scheme to build infrastructure projects and urged that these financing schemes be transparent, consistent with debt sustainability and ensure value for money’.
13. The following are some of the incredible appetites for borrowing and mortgaging of future revenues;
Mortgaging mineral royalties from mining operations for the next 30 years to borrow $750 million. This means that for the next 30 years, successive Governments would not be able to leverage these royalties for development. Instead, they would be saddled with huge debt overhang should prices of gold and other minerals such as bauxite and diamond slump on the world market or we experience low output from the mines.
Mortgaging bauxite yet to be mined for the next 10 years to borrow $2 billion on deferred payment terms from Sinohydro. This encumbers critical future flows that could give flexibility in the management of fiscal space. It is important to note that the Sinohydro deal imposes a contingent liability on the state and will crystallise as a public debt immediately Sino hydro delivers the underlying projects.
Mortgaging 30% of GETFUND proceeds for the next 10 years to borrow $1.5 billion. This will come at additional annual interest payments to further squeeze fiscal space. This is despite loans coming in every now and then to Parliament for approval to finance education infrastructure.
14. Consignment of ESLA proceeds to ESLA PLC to finance energy sector bonds of about $2.5 billion of energy sector legacy debts
The build-up of an additional $2.8 billion by energy sector SOEs between 2017 and 2018.
The issuance of bonds of about GH¢13 billion for the collapse of nine banks and a further GH¢5 billion projected for 2019 to bring the total cost of the financial sector collapse to GH¢18 billion. That is, the taxpayer is carrying a cost of $3.75 billion in addition to an annual interest payment of about GH¢1.8 billion a year for the next 10 years. This translates into interest payment of $375 million per year and increasing to $3.75 billion in 10 years in interest payments. In all, the Ghanaian taxpayer will pay $7.5 billion in interest costs and principal over a 10-year period for the vicious collapse of nine indigenous banks.
15. These encumbrances and the borrowing spree will significantly increase fiscal rigidities, elevate the risks of debt distress and expose the country to headwinds. The interest payments associated with these financial instruments will worsen the challenges of crowding out fiscal space from interest payments, which is currently budgeted at some staggering $3.875 billion for 2019. Instructively, this government has added $1.625 billion to interest payments in just three years from the 2016 figure of $2.25 billion. With a wage bill that has been increasing at a rate of 21% per year in the last three years and revenue stagnant at around 12.6% of GDP in the last two years, the government needs to be caution, going forward.
REFORMS TO IMPROVE DEBT MANAGEMENT AND DEFECTS IDENTIFIED
16. The main thrust of Ghana’s and for that matter, any country’s debt accumulation is the level of fiscal management and how it is restrained by the legal regime. Over the years, Ghana has struggled to improve revenue generation to fund the budget. As revenues underperformed, successive Governments have resorted to expenditure cuts in pursuit of crude fiscal consolidation. Ghana’s revenue generation situation is uninspiring. Currently, the revenue measures from the various tax handles rake in just about 12.6% of GDP. Unfortunately, the burden of this tax revenue is borne by just a few Ghanaians. Every Government has spoken about widening the tax net but the net has been shrinking given the levels of population growth and the growing size of national income.
17. A major problem in relation to Government revenue is the rigidities in the utilization of the revenues. Legally assigned revenues, otherwise known as statutory funds constitute over 70% of tax revenues. This situation eliminates flexibility in the deployment of revenue and stifles the government’s ability to move funds to change priority needs without being cited for legal breaches.
18. The combined effects of low revenue generation and fiscal rigidities are as follows;
Lack of budget credibility as budget holders are uncertain as to how to proceed with the implementation of the budget.
Difficulty in budget controls as expenditure commitments are either ahead of revenue yields or suffer downward reviews at mid-year. The result has been stringent commitment controls through the issuance of commencement certificates that are often lagging behind revenue numbers.
Postponement of investment in badly needed infrastructure such as roads, power generation capacity and social infrastructure in education, health care and social housing.
Backlog of infrastructure demands that compels politicians to overrun the budget in election years, leading to an unsustainable fiscal expansion that derails fiscal consolidation and high debt levels.
19. There have been major reforms aimed at addressing address some of these challenges and to provide the legislative framework for debt management. In 2016, Ghana passed a new Public Financial Management Act, 2016 (Act) as consolidated legislation to provide the framework for managing, not just debt but to regulate a range of activities that impact debt sustainability. This law introduced several reforms and provided the framework for Ghana’s debt management strategy.
The key strands of that law are to achieve the following;
Provide transparency, certainty and appropriate fiscal rules to achieve budget credibility.
Provide guidelines for approval, implementation, reporting and oversight of fiscal and financial operations of Government.
Provide a framework for Government's debt management strategy, architecture, reporting and parliamentary oversight.
Provide for ring-fencing of funds for debt service, repayments and liability management
Provide for sanctions regime
20. The PFM Act is an elaborate legislation that answers basically all questions on Ghana’s reforms in fiscal management, controls and safeguards for debt management and sustainability. I will, therefore, highlight salient provisions to demonstrate that Ghana has one of the best debt restraining frameworks, which, when religiously and thoroughly implemented, should provide an enduring solution to the debt question. As a matter of fact, the preamble to the law is all-embracing and I quote;
AN ACT TO REGULATE THE FINANCIAL MANAGEMENT OF THE PUBLIC SECTOR OF GHANA WITHIN A MACROECONOMIC AND FISCAL FRAMEWORK; TO DEFINE RESPONSIBILITIES OF PERSONS ENTRUSTED WITH THE MANAGEMENT AND CONTROL OF PUBLIC FUNDS, ASSETS, LIABILITIES AND RESOURCE, TO ENSURE THAT PUBLIC FUNDS ARE SUSTAINABLE AND CONSISTENT WITH THE LEVEL OF PUBLIC; TO PROVIDE FOR ACCOUNTING AND AUDIT OF PUBLIC FUNDS AND TO PROVIDE FOR RELATED MATTERS.
Ghana’s debt management strategy is based on the time-tested principles of a transparent and controlled fiscal regime as a starting point for managing debt build-up. Though fiscal provisions are elaborate, I will concentrate on a few areas to demonstrate this point.
FISCAL STRATEGY DOCUMENT
21. Section 15 of the PFM Act requires the minister to submit to the cabinet for approval not later than the end of May of each financial year, a fiscal strategy document. When approved, the fiscal strategy document becomes Governments Economic financial and economic policy to guide the formulation of Governments budget and estimates for the ensuing year. This document contains the following;
? The medium-Term Fiscal Framework of the Government with measurable fiscal objectives and targets to inform short to medium term fiscal planning for the ensuing three to five years. This should comply with agreed fiscal principles and objectives of Government
? Updated and comprehensive medium-term macroeconomic and fiscal forecasts covering current developments and multi-year projections in line with Government’s medium-Term Economic Development Programme in force
? A statement of policy measures the Government shall implement in order to stay within the fiscal policy objectives.
? A comprehensive and quantified fiscal risk statement for the public sector showing the impact of alternative macroeconomic assumptions on the forecast fiscal balances and quantified risks of guarantees, contingent liabilities and public-private partnerships.
? The Medium-Term Debt Management Strategy including debt sustainability analysis and sensitivity analysis of macro risk scenarios
? A progress report on the implementation of the fiscal strategy document for the previous financial year
? The alignment of other statutory and earmarked funds to the national macro-fiscal goals and targets and
? Proposal of numerical fiscal rules consistent with fiscal objectives and fiscal policy indicators and in compliance with the Petroleum revenue management Act as amended.
The Fiscal Strategy Document as approved by Cabinet with any changes then forms the basis for the guidelines issued by the Minister for Finance for the preparation of estimates to inform the preparation of the economic policy and budget estimates for approval by Parliament, including appropriations.
22. In order not to derail the fiscal objectives and rules, the Minister responsible for Employment is expected to conclude salary negotiations not later than April for these to be factored in the fiscal strategy document.
This clearly resolves the problem of proper planning and executive review of fiscal policy, budget implementation progress and overview of progress. There is also a focus on guarantees, contingent liabilities and debt sustainability.
The linkage between the fiscal risk analysis statement and macroeconomic sensitivity analysis is critical in ensuring that fiscal management does not hurt growth and structural development of the country.
HOWEVER, THERE IS A MAJOR WEAKNESS IN THE PROCESSES OF APPROVAL OF THE FISCAL POLICY DOCUMENT THAT COULD BE ADDRESSED WITH AN AMENDMENT TO THE PFMA.
THE APPROVED FISCAL POLICY DOCUMENT BY CABINET SHOULD RECEIVE PARLIAMENTARY INPUTS TO BE FINALISED. THIS SHOULD CONSTITUTE PART OF THE PROCESSES OF PARLIAMENT REVIEW, DEBATE AND APPROVAL OF THE GOVERNMENT’S ECONOMIC POLICY WHICH NORMALLY ACCOMPANIES THE BUDGET, IS DEBATED AND APPROVED SEPARATELY FROM THE BUDGET ESTIMATES AND THE RESULTANT APPROPRIATION ACT.
THIS IS BECAUSE THE CURRENT DISPENSATION DOES NOT ALLOW INPUTS OF THE LEGISLATIVE BODY TO IMPACT GOVERNMENT POLICY, ESTIMATES AND APPROPRIATIONS.
APART FROM POLICY INCONSISTENCIES THAT ARE OFTEN POINTED OUT BY MEMBERS THAT REQUIRE REVISIONS, THE LEVEL OF ANALYSES AND JUSTIFICATIONS SUCH AS FISCAL RISKS STATEMENT, SENSITIVITY ANALYSIS SUBMITTED TO CABINET WILL ENRICH THE TOOLS AVAILABLE TO PARLIAMENT TO IMPROVE ITS OVERSIGHT AND DELIBERATIVE ROLE IN THE FISCAL POLICY DEVELOPMENT PROCESS.
DEBT MANAGEMENT STRATEGY
23. The legal framework for Ghana’s debt management strategy is provided for by the Public Financial Management Act. The Act provides the following key pillars for the management of public debt;
? Establishment of Debt Management Office
? Approval and publication of debt management strategy annually and on an updated rolling basis.
? Preparation of borrowing and recovery plan
? Guidelines on borrowing domestically, foreign and from Banks and financial institutions
? Publication of Government Debt and finance arrangements
? Establishment and maintenance of appropriate database and records of public debt
? Parliamentary approval of loans and borrowing program.
? Guidelines on borrowing by local government authorities, public corporations and state-owned enterprises
? Annual debt management reports to Parliament including status of debt and guarantees and
? Establishment and guidelines for creating and utilising sinking fund.
These are some of the areas that require further interrogation in relation to the effectiveness and adequacy to deal with the threats of our ballooning debt situation.
24. A review of Ghana’s debt position and dynamics show a deteriorating public debt situation in view of the risks that the PMFA seeks to address. It is, therefore imperative to interrogate the fiscal and institutional arrangements that have been designed to achieve debt sustainability to better understand what has worked and what needs to improve, going forward. Some of the areas that require the attention of this stakeholder engagement may include the following;
? A review of the fiscal controls and transparency measures in the Public Financial Management Act
? Methods of reporting fiscal and economic performance, with emphasis on accrual notes for arrears and commitments, utilisation of foreign drawdowns and transmission mechanisms in deficit reporting.
? The operations of sinking fund, liability and a tightening of its reporting and transmission into the fiscal framework
? Tightening of future revenue encumbrances and transmission into national debt stock for debt sustainable.
? Mechanism for developing the local financial markets to improve local participation in the domestic bond market
25. Going forward, I am positive that this deliberation will set eh stage for an informed dialogue on how to better align existing regulations with policies to help produce a superior debt management system that can withstand the test of current times
It is obvious that laws and regulations need to be abreast with the times if our individual debt management strategies are to make any meaningful impact in an increasingly fluid society. On behalf of Finance Committee of Parliament, let me assure you that we the law makers are prepared to work with stakeholders like you to produce superior legislations that will entrench accountability, sustainability and prudence in the accumulation and spending of borrowed funds.
I wish you all a fruitful deliberation.