Ghana’s debt must be brought down to sustainable levels, says BoG

Dr Ernest Addison says Ghana’s public debt has reached 71% of the estimated GDP as at the end of September 2020

The Governor of the Bank of Ghana (BoG), Dr Ernest Addison says the country’s public debt must be brought down to sustainable levels to contain risks posed to future financing of the budget.

Speaking at the University of Ghana Alumni Lecture, Dr Addison said, “public debt levels have risen following the necessary fiscal expansion in the short-term to contain the impact of the pandemic.

“Hence, there is the need to design a plan to bring down the debt to sustainable levels to contain risks posed to future financing of the budget, exchange rate stability and financial sector stability post-COVID-19.”

He said, “the framework should include a clear priority towards expenditure rationalization and efficiency, as well as improving revenue collection capacity.”

According to Dr Addison, Ghana’s public debt has reached 71% of the estimated GDP at the end of September 2020, fairly above the maximum early warning sustainability threshold of 70% for the Market Access Countries (MACs).

“The country’s debt service indicators and gross financing needs have breached the sustainability thresholds. The non-resident holdings of the public debt, although declined, is still high at 59.9% of GDP, above the threshold of 45% for the MAC.”

He said, “Public gross financing needs are also above the 10% MAC threshold on the back of increased fiscal obligations, suggesting constrained fiscal space for growth spending. Although external financing requirement as a share of GDP has declined and within acceptable thresholds, efforts would need to be put in place to increase buffer levels to help meet future external obligations.”

In ensuring financial stability, Dr Addison said the financial sector will require constant regulatory and policy attention to identify and mitigate emerging risks.

“By and large, the economic impact of the pandemic may result in higher non-performing loans and some capital erosion of banks. Hence, the Bank is putting greater focus on identifying the early warning signals and initiating prompt corrective actions.”

He said the symptoms of a weaker bank are usually poor asset quality, lack of profitability, loss of capital, excessive leverage, excessive risk exposure, and poor governance conduct as well as liquidity concerns.

“In this respect, the Bank of Ghana will continue to strengthen all the regulatory measures implemented over the last three and half years to maintain confidence and safeguard financial stability.”

Dr Addison said, over the next three years, in the aftermath of the pandemic, the Bank of Ghana will carefully unwind the countercyclical measures implemented and allow the financial system to function without the regulatory forbearance put into place due to the pandemic.

“Banks themselves will have to remain vigilant, upgrade staff capabilities, and improve the governance and risk culture. The Bank of Ghana is optimistic that with this approach, a resilient and capable financial sector will weather the storms brought about by the pandemic and ensure soundness of the industry,” he added.

Dr Addison said, going forward, difficult decisions will have to be taken to reorganize public finances and expenditure priorities while exploring more sustainable revenue sources.

He said, “The programme of interventions to revitalize businesses and cushion households will have to be defined to scale and there should be no expectation that these should become permanent obligations of government.”

“The wide fiscal gap raises important financing issues, and its financing should not be by recourse to central bank funds as this will weaken the central bank’s ability to serve as the anchor of monetary and exchange rate stability,” he added.

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