Graphic Business News

Poor countries cautioned against excessive borrowing  

By: Kester Aburam Korankye
Christine Lagarde, MD of IMF

The Managing Director (MD) of the International Monetary Fund (IMF), Ms Christine Lagarde, has cautioned developing countries such as Ghana to halt piling debt or remain venerable to sudden tightening of global financial conditions and higher interest costs.

She said high debt burdens could stifle growth and jeopardise development goals, as governments would be forced to spend on debt service instead of infrastructure.

“Rapidly growing debt burdens could jeopardise their development goals, as governments spend more on debt service and less on infrastructure, health and education,” she said at a sovereign debt restructuring conference at the IMF’s headquarters in Washington on September 13. 

Rising public debt 

The caution comes at a time when Ghana’s public debt is mounting - from GH¢122.2 billion in 2016 to GH¢142.5 billion as of December 2017 -, indicating a 17 per cent debt accumulation for one year before rising again to GH¢154 billion as of the end of May this year. 

An economist, Prof. John Gatsi, told the GRAPHIC BUSINESS on September 14 that the country could end the year with GH¢170 billion as its debt stock should all things remain equal, and that could have implications on the country’s debt management in the future. 

“If we are not able to manage our debt, it will become a crisis for us in the future and that is why I think that advice is apt and we should take it up,” he said in reaction to the call by the IMF for developing countries to minimise their debt stock. 

The country’s escalating public debt may, however, have no end in sight as the government intends to access more debt from the Chinese government to provide resources to finance infrastructure and industrial development projects.

In July this year, Parliament approved a US$2 billion Master Project Support Agreement (MPSA) between Ghana and Sinohydro Corporation Limited for the construction of priority infrastructural projects.

Under the deal, Sinohydro Group Limited of China will provide US$2 billion of infrastructure of the country’s choice in exchange for Ghana's refined bauxite.

 Source of debt 

However, Prof. Gatsi said the source of the debt was also significant as borrowing from markets which were sensitive to changes in the global dynamics could have consequences on debt management. 

“We are borrowing from markets which are very sensitive to changes in the global dynamics, so now the currency depreciation we are talking about will contribute to the upscale of the debt because we compute our debt from those we take from foreign sources in foreign currency and if we want to service such loans in Ghana terms, we need to convert in today’s current system, so it means that the depreciation is also increasing the debt stock. 

“If that is the case, capital may not be permanent in the country and that will be creating volatility for the currency and also affect debt management,” he stated. 

 Restructuring Chinese debt 

To mitigate such unforeseen challenges accompanying debt secured from non-traditional lenders, Ms Lagarde said bilateral lenders needed better collaboration to prepare for debt restructuring cases that involved non-traditional lenders. 

 “We need to think about new ways in which official creditor coordination - often so critical to debt crisis resolution - can take place, and building trust in sovereign borrowers is now more important than ever, especially in low-income countries,” she noted.

She explained that historically, low-income countries mostly relied on international institutions and traditional bilateral creditor countries, which could use the Paris Club to coordinate their actions on debt issues but had begun to rely more heavily on non-traditional lenders - from bond investors to foreign commercial banks, commodity traders, creditor countries outside the Paris Club which may not be favourable to their development.

“The shift towards new borrowing sources generally means higher interest rates and shorter maturities and borrowing from non-Paris Club lenders also means that creditor coordination will likely become more complicated,” she said. 

Building trust 

To build urgently needed trust in sovereign debtors, Ms Lagarde said policy priorities, including greater efforts to make borrowing more sustainable, could help make a difference in low-income countries.  

“Greater efforts are needed to make borrowing more sustainable. This means proceeding prudently in taking on new debt, focusing more on attracting foreign direct investment and boosting tax revenues at home,” she stated.

This will require low-income countries to focus on investment projects with credibly high rates of return and increasing the responsibility of lenders who need to assess the impact of new loans on the borrower’s debt position before providing the new loans.


“We need to ensure that all countries adhere to rigour and transparency in their borrowing and lending practices. For example, there is room to significantly strengthen the institutions that record, monitor and report debt in individual countries,” she said— GB