Tuesday, March 19, 2024

Ghana’s High Public debt: Dire implications for development – Economist

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An Economist Emmanuel Amoah-Darkwah has expressed fears that Ghana’s high public debt could have implications on future developments. He asserted that the spate at which the country’s debt is shooting up, it could result in a situation that leads to lack of fiscal space for development.

Ghana’s public debt per the latest Bank of Ghana (BoG) Summary of Economic and Financial Data is 304.6 billion Ghana cedis at the end of March 2021. Some economists have attributed the upswing to the $3billion Eurobond raised by the country in March this year.

Close of December last year, the country’s debt stood at 291.6 billion Ghana cedis. The current public debt of 304.6 billion Ghana cedis is equivalent to 70.2% of Gross Domestic Product (GDP), lower than the 76.1% registered in December, 2020.

But for Emmanuel Amoah-Darkwah, government must tread cautiously and device another innovating ways of raising money for projects as continuous borrowing will lead to high cost of interest. He explained that once government keeps borrowing it must also spend more in amortizing the loan, “so once your public debt is increasing, the rate of your interest will also increase”.

Once you are borrowing more, you have to spend more in amortizing the loan. As we speak in the 2021 budget, government is spending about 25 billion cedis to amortize our debt and at the same time spending about 30 billion on wages and salaries, so once your public debt is increasing, the rate of your interest will also increase”.

Another worrying impact the country’s high public debt could have on our development as identified by the economist is the tendency of crowding out the private sector from receiving credit for expansion of their businesses. He said for the domestic debt, banking sector will have the advantage of raking in profit to the detriment of the business community which needs more money to survive in the sector, since banks can afford to loan to government in the event it wants to float bonds and treasury bills.

“This can also result into crowding out of the private sector from receiving credit for expansion of their business. Especially for domestic debt, if government is going in to floating bond and treasury bills, it means banks will be happy and comfortable to lend to government at the expense of the business community which needs more money to expand their businesses”.

Ghana cedi is no stranger to depreciation. It is for this that Mr. Amoah-Darkwah expressed worry that should there be depreciation in the face of high public debt, the debt components will become very expensive, thereby forcing the country to pay more on loans contracted.

Here when you are issuing a lot of commercial loans and foreign debts, once your currency depreciates, it will lead to a spike in the public debt. Assuming you are armotizing loan in 2010 and the dollar rate at the time was to 4 cedis, and in 2020 you want to amortize same loan and the cedi to a dollar is 5 cedis, what it means is you need to exchange a lot of Ghana cedis to dollar in order to amotize that loan so it becomes expensive to amortize loan when your currency keeps depreciating”.

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