Last week’s National Economic Dialogue was held despite earlier misgivings about the time available in the face of the looming March 11 date for the presentation of the 2025 budget to Parliament.
Although the Dialogue may have come too late for its recommendations to be fully incorporated into the 2025 budget – especially with the International Monetary Fund inevitably placing constraints on the expansionary aspects – those recommendations provide a good framework for a homegrown medium term economic plan to achieve sustainable economic growth.
But the Dialogue has failed to correctly address a fundamental shortcoming with regards to Ghana’s public debt management. While the macroeconomic management experts at the Dialogue recommended a 60% ceiling on the public debt to Gross Domestic Ratio, Dr Nii Noi Thompson, the new Chairman of the National Economic Planning Commission has pointed out that it is Ghana’s ability to service its debt that should be the major consideration.
He is right, but we want to go further and quantify his suggestion. Indeed, sustainable public debt as a proportion of GDP differs widely from one economy to another. For instance, while many African countries such as Ghana itself struggle with a ratio of less than 70%, countries such as the United States and Japan are comfortable with ratios of more than 100%. This is because of their relatively high tax revenues as a proportion of their respective GDP’s and their superior US dollar holdings.
Ghana’s tax revenues are a mere 16% of its GDP and achieving the 24% target set by the IMF by 2026 is improbable, nay impossible. Indeed it is instructive that Ghana’s current economic crisis erupted in 2022 when the public debt to GDP ratio was less than 80% (going by the then government’s self-delusionary data which ignored large swathes of the actual public debt which still had to be serviced); but the servicing of the full debt was costing the country more than 50% of its tax revenues.
Worse still, the country had become so addicted to heavy forex inflows through sovereign debt issuances to foreign investors that efforts to significantly expand the state’s forex earnings had all but halted. Consequently, a crash was inevitably just a matter of time.
Ghana’s peculiar circumstances aside, using the public debt to GDP ratio is dubious even under the best of circumstances. When banks consider giving a household loan they consider the accompanying loan repayment obligations as a proportion of the household’s income – the rule is that it should not exceed 40% – not the repayments as a proportion of the value of that household’s assets. This is avoid the household taking a loan it would have difficulty in servicing
Ghana should adopt this common sense approach; it should weigh its public debt servicing obligations against the anticipated state revenues from which they would be met.
This means weighing cedi denominated debt servicing obligations against anticipated tax revenues and forex denominated debt servicing requirements against projected forex earnings accruing to the state. That way the government would not take on debt that it would not be able to service, such as has happened twice within the past three decades.
Public debt management can be complicated. But it must be underpinned by an ample dose of sheer common sense.
