Public debt set to increase on new IMF advice

Ghana’s public debt is expected to further rise based on the insistence of the International Monetary Fund that the legacy energy sector debt now be classified as part of the country’s public debt. This reverses the hitherto classification under which it has been excluded from the public debt by assigning it to a special purpose vehicle, ESLA plc which was established by government to raise revenues through taxes and levies to amortize it.

This comes at a time when the country public debt has increased from GHc 172.9 billion in January 2019 to GHc 205.5 billion in July 2019.

The ongoing IMF Mission in Ghana, which is scheduled today, forms part of the Fund’s mandatory multilateral surveillance for all IMF-member countries.

As at the end of first quarter 2019, the country’s energy sector debt stood approximately at GHc 10 billion. Hence, based on this new recommendation, the country’s debt stock would rise to GHc 215.5 billion, as at end July 2019, the latest date for which data is available currently.

The addition of the outstanding energy sector debt to the public debt would take Ghana’s debt to Gross Domestic Debt ratio to 60 percent, which is the upper threshold for debt sustainability, although Ghana since has shifted the threshold to 70 percent since it first hit the 60 percent threshold around the middle of the decade.

This notwithstanding, the IMF mission has indicated that the country’s macroeconomic situation remains favorable, although its projected GDP growth rate for 2019 has been downgraded from 8.8 percent to 7 percent. This more in line with government’s own target of 7.6 percent which the IMF itself had believed would be well exceeded until the new downgrade of its expectations.

During the 2019 mid-year budget review, the overall budget deficit was revised at 4.5 percent of GDP, up from 4.2 percent originally. This is consistent with the government’s debt sustainability analysis for 2019 and the medium-term. Government recently legislated a cap of 5.0 percent on its fiscal deficit in any given year to curb budget overruns which have occurred in the past, especially during election years, the next one being next year.

Instructively however, the fiscal deficit targets – and actual performance assessments – do not include the cost of financial sector reforms on the basis that these are abnormal, one-off expenditures, even though they have occurred in each of the past there years (including 2019), totaling nearly GHc20 billion so far. Including those expenditures in the fiscal deficit computations would have increased it significantly in each of the three years.

The finance Minister, Ken Ofori-Atta also noted that, notwithstanding the significant progress that has made so far, the serious challenges being faced in the energy sector pose grave financial risks to the whole economy.

This is based on the take-or-pay contracts signed by the erstwhile government, which obligate the current government to pay for capacity that the country does not need. The result has led to the payment of over half a billion U.S. dollars or over GHc 2.5 billion annually for power generation capacity that is not consumed.

Similarly, for gas, it is expected that from 2020, if nothing is done, the country will be facing annual excess gas capacity charges of between US$ 550 and US$850 million every year.