Graphic Business News

Economy at the mercy of foreign investors

By: Emmanuel Bruce

As a result of the failure to develop the financial markets to support domestic financial resource mobilisation to fund the annual budget, the country’s economy continues to be at the mercy of foreign investors, the Member of Parliament of Bolgatanga Central, Mr Isaac Adongo, has noted.

He said beyond the quantum of debt and the rate of accumulation, the composition of the country’s debt holdings also posed eminent risks to the balance of payments and external vulnerability.
In his keynote address at the Ghana Debt Advocacy Meeting which was organised by Grass Roots Africa in Accra, he said as of the end of 2018, foreign investors held 30 per cent of the country’s domestic bonds.
“In addition to our external debt portfolio, about 64.88 per cent of Ghana’s entire public debt was in the hands of foreign investors as of the end of 2018. Within three months of 2019, this had worsened to 67.17 per cent. 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 poses 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,” he explained.

Debt service
Mr Adongo said the country had one of the highest debt services in Africa, spending over US$4 billion on debt service between 2017 and 2018.
That, he said, was equivalent to 80 per cent of the entire US$5 billion Eurobonds issued in 2018 and 2019.
“This is incredible. Between 2017 and 2018, Ghana spent about 42 per cent 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,” he stated.

Rising broad view of debt stock
Mr Adongo, who is also a member of the Finance Committee of Parliament, pointed out that the country’s public debt statistics as reported by the Bank of Ghana (BoG) represented just the narrow view of gross public debt and did not reflect the entire debt stock of the country that was taken into account in calculating debt sustainability.

“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 range 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,” he explained.

Mortgaging mineral royalties
Mr Adongo also noted that the government’s decision to mortgage mineral royalties from mining operations for the next 30 years to borrow US$750 million meant 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.

“Mortgaging bauxite yet to be mined for the next 10 years to borrow US$2 billion on deferred payment terms from Sinohydro will also encumber 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 Sinohydro delivers the underlying projects,” he noted.

He said mortgaging 30 per cent of GETFund proceeds for the next 10 years to borrow US$1.5 billion would also 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,” he said.
He believed those encumbrances and the borrowing spree would significantly increase fiscal rigidities, elevate the risks of debt distress and expose the country to headwinds.

He said the interest payments associated with those financial instruments would worsen the challenges of crowding out fiscal space from interest payments, which were currently budgeted at some staggering US$3.875 billion for 2019.