EconomyMatters Arising

Ghanaians and investors must get ready for a painful economic haircut

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Ghanaians and investors must get ready for a painful economic haircut –Dr. Ato Forson

Ghanaians and investors must get ready for a painful economic haircut. This is a strong warning from Dr. Atto Forson during the talk added that the haircut will hit you directly or indirectly. It doesn’t matter if you have no hair. It will be crude and extremely painful. Don’t celebrate if you are bald headed like me, the crude haircut will still find you…He added.

Ghanaians and investors must get ready for a painful economic haircut

NPP administration has been responsible for about 80% of Ghana’s total public debt since Kwame Nkrumah, in only 6yrs, with very little to show. This government has successfully driven our dear country into the ditch by making our debt highly unsustainable to a point of no return.
  • Ghana has been made poorer under this administration. COCOBOD has accumulated over GH¢14 billion in cocoa bills (loans), ECG owes IPPs over GH¢12 billion, almost every single State Owned-Enterprise is insolvent. The situation is scary and worrying.
  • Currently, the gov’t owes contractors and suppliers about GHS100billion. The following shows some of the debt owed by various State Entities.
  • This ineptitude and intransigence has occasioned loss of confidence in the Ghanaian economy by the investor community
  • Businesses are moving from Ghana to Ivory Coast and other neighboring countries, companies are shutting down and lay-offs are becoming a daily routine with frequent and devastating downgrades by rating agencies

WHERE WE HAVE COME FROM – THE GOOD OLD DAYS

  • The Akuffo-Addo/Bawumia Government inherited a total public debt of about GHS120 billion representing 55.6% of GDP as at end 2016
  • Today, the world bank has projected Ghana’s public debt to hit 104.7% of GDP by end 2022 which means that our actual public debt by end 2022 will be about GHS522 billion
  • In nominal terms, within 6 years in office the Akuffo-Addo/Bawumia government would have accumulated about GHS402 billion fresh debt by Dec. 2022
  • This means that within 6yrs in office the Akuffo-Addo/Bawumia government has accumulated the equivalent of 50% of today’s GDP in fresh debtUNSUSTAINABLE DEBT LEVEL : Ghana’s Total Public Debt has increased from GH¢120 bn at end 2016 to GH¢393 bn as at June 2022
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GHANA’S CURRENT CREDIT RATING

  • The Spread (interest rates) of Ghana’s sovereign bonds have widened significantly in the International Capital and Domestic Market
  • This year alone, as a result of our deteriorating economic condition, Rating Agencies have downgraded Ghana’s credit worthiness in an unprecedented manner;
 Fitch from B- to CC with Outlook under Review;
 Standard and Poor’s from B- to CCC+ with a Negative Outlook; and 
 Moody’s from B3 to Caa2 with Outlook under Review
  • Our unsustainable debt levels have led rating agencies to describe Ghana as a country where debt default is imminent with very little prospect for recovery
  • These rating agencies are likely to downgrade Ghana further to D in the coming months because of an obvious and pending debt restructuring

THE PUBLIC DEBT BURDEN IS THE MAIN PROBLEM

  • Excessive Borrowing leading to Huge Public Debt Overhang and the loss of access to the International Capital Market is the Elephant in the Room.
  • Ghana’s public debt overhang has reached an unprecedented level, and is trending upwards.
  • Even though, public debt levels have risen across some countries, the capacity to live with such debt levels varies considerably from country to country; the ability to repay is not the same
  • The Akufo-Addo/Bawumia Government refuses to accept that, Ghana’s economic woes are deeply rooted in its accumulation of public debt to an unsustainable level.
  • The following analysis confirms that Ghana’s unsustainable debt is the problem.

GOVT’S RECKLESS FISCAL BEHAVIOUR AND CREATIVE ACCOUNTING IS THE REASON FOR DEBT OVERHANG

  • The debt level is the main problem, but it should be noted that gov’t reckless fiscal behavior and creative accounting is the reason for this huge debt level
  • The rise in debt service cost has mostly been due to huge fiscal deficits and large budget financing needs since 2018, when the fiscal indiscipline started
  • As a result of reckless borrowing and government policy of “one problem. one loan(1P1L)”, debt service cost is now exceeding 8% of GDP\
  • The rising debt service cost has crowded out most critical expenditures, such as education and health
  • Ghana has reached a point where about 90% of our tax revenue is used to service debt making it virtually impossible to pay for statutory funds from the same tax revenue
GOVT’S RECKLESS FISCAL BEHAVIOUR AND CREATIVE ACCOUNTING IS THE REASON FOR DEBT OVERHANG

GHANA’S ABILITY (OR RATHER INABILITY) TO REPAY ITS DEBT

  • There is the need to examine Ghana’s ability or rather inability to repay its debt
  • In the first six months of 2022, i.e., Jan. – Jun 2022, Ghana’s total tax revenue was GHS30 billion
  • During the same period debt service obligation was GHS26.1 billion, representing 87% of tax revenue. Leaving only GHS3.9 billion to run the entire nation for the period
  • Government spent GHS17 billion on compensation of employees (wages & salaries) alone, for the same period. This means that the government borrowed to pay for wages & salaries between Jan and June of 2022
  • Ghana’s half year total tax revenue of GHS30 billion (Jan-Jun 2022) was certainly not enough to pay for our debt service obligation and wages & salaries amounting to GHS43.1 billion(GHS26.1b+GHS17b)
  • This is largely because of the huge debt service obligation as a result of reckless borrowing
  • It should be noted that, out of the GHS30 billion tax revenue, GHS10 billion is earmarked for statutory funds such as DACF, NHIL, GETFund, RoadFund and this means they were not be paid
  • Ghana has inevitably reached a point where the interests of creditors and the public have collided
  • Creditors, including T-bills holders, bondholders, term loan holders, gov’t contractors, etc. definitely want to be repaid according to the terms of their finance agreement or contract
  • On the other hand, the public wants public pension to be paid, healthcare to be provided, roads to be maintained, children to be educated
  • The truth is, Ghana cannot currently afford to repay its debt according to the finance agreement and provide public goods at the same time.
  • Ghana is simply insolvent in other words bankrupt.
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CONSEQUENCES OF DEBT RESTRUCTURING

  • Ghana will be the first Sub-Saharan African country to restructure its commercial debt with huge reputational damage
  • From a Heavily Indebted Poor Country(HIPC) to Sovereign Insolvency Stress (SIS) all within 20yrs.
  • Economic growth in the next 3yrs will be the biggest casualty
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RECOMMENDATIONS

  • The future of our dear country is at stake and there is the need not to leave our future and livelihood only to the ruling government, we all have to get involved
  • We cannot sit unconcerned and wait for IMF to save our dear country. There are economic tools that can be deployed to save our country from collapse
  • The minority recommend a set of policy options for government and demand urgent consideration.
  • Curbing inflation should be the top priority: Ghana does not want inflation to be entrenched, we need to confront inflation now before it becomes too late.
  • The Bank of Ghana needs to anchor inflation expectation immediately. They should stop the printing of money otherwise knowns as monetary financing to finance government expenditure.
  • To stem the rapid depreciation of our cedi the Bank of Ghana may have to call for an emergency monetary policy committee meeting and consider the need to hike the monetary policy rate, even if it is for purposes of signaling that somebody is in charge
  • Government must prioritize and rationalize expenditure by cutting all unnecessary and frivolous expenditures imposing taxes at this time will hurt Ghanaians and undermine economic growth and recovery. However, there is an urgent need to improve compliance in tax collection
  • There is an urgent need to support the poor and the vulnerable in our society since the economic hardship is affecting them the most
  • It is unfortunate but it looks like the time has come for the Bank of Ghana to implement emergency foreign currency management by introducing the infamous Capital Flow Management (CFM) measures.
  • The haircut will hit you directly or indirectly. It doesn’t matter if you have no hair. It will be crude and extremely painful
  • Don’t celebrate if you are bald headed like me, the crude haircut will still find you
  • Mr. President, please beware that, a micky mouse form of debt restructuring will hurt Ghana BIG TIME. Your debt restructuring must not target domestic creditors. It will destroy us
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Source: Dr. Cassiel Ato Forson

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