The increase in external debt threatens the stability of the cedi – Databank

Company News on Friday, June 7, 2019

Source: Myjoyonline.com

2019-06-07

The more the government uses debt denominated in currencies such as Eurobonds, the more it puts pressure on the local currency and its ability to remain stable, according to the latest badysis of the public debt of Ghana conducted by Databank Research.

"2019 Eurobonds have increased the share of debt denominated in foreign currencies, thus increasing the vulnerability to exchange rate shocks," the badysis said.

With the weak appetite of foreign investors for cedi-denominated bonds, a result of the government's heavy reliance on dollar-denominated bonds and the sharp depreciation of the cedi in the first quarter of 2019, the share of debt foreign exchange accounts for 53% of total debt.

Courage Martey, an economist and badyst at Databank, explained that with the increase in the share of US dollar debt, a sharp depreciation of the local currency would result in a large increase in the public debt portfolio.

"The increase in Ghana's total public debt tends to reflect that of the country's external debt, which reflects the performance of the exchange rate. Overall, we consider that the higher foreign exchange bond is a potential vector of exchange rate shocks, while persistent revenue deficits also increase the public sector's financing needs, spending remains rigid, "he said.

Recent Developments in the First Quarter of 2019

Total public debt rose sharply by GHG 24.8 billion in the first quarter of 2019 to reach GHG 198 billion or 57.5 percent of projected GDP, taking into account the additional budgetary cost of GH ¢ 1.2 billion. resulting from financial sector reforms in 2018.

The 2019 budget forecasts a deficit of 14.54 billion GHGs, or 4.2% of GDP, excluding budgetary costs related to the reforms of the non-bank financial institutions sector.

The deficit will be financed by domestic loans of 4.78 billion GH ¢ and external loans of 9.75 billion GH.

However, revenue mobilization remains a challenge despite increasing pressure for spending. Preliminary fiscal data for the first quarter of this year showed persistent deficits in revenue (against targets), while the government faced increasing spending commitments.

The total revenue for the period, which amounted to 10.1 billion GH ¢, was 2.3 billion GH ¢ while the government was able to limit total expenditure to 16.5 billion. GH, 800 billion less than the budget ceiling. This resulted in a larger-than-expected primary deficit, equivalent to 0.8% of GDP, confirming the stronger than expected increase in borrowing for the quarter.

Although domestic revenue tends to improve in the second half of the year, the persistent deficit of annual results (since 2016) remains a major threat to the sustainability of public finances and debt.

The badysis highlights that the revenue outlook for 2019 is based on strict enforcement of tax compliance; reduce the amount of revenue lost to tax exemptions, which represents about 1.6% of GDP; digitization and port reforms; and broaden the tax base beyond the current 25% coverage for direct taxes, among others.

"We expect an improvement in direct tax revenues in the course of the year, but we remain cautious about revenue from international trade taxes," the report says.

The reduction of import duties is causing concern

In April 2019, the government reduced the reference values ​​for the calculation of import duties – 30% for vehicles and 50% for other imports – in the hope of redirecting container traffic from neighboring ports to Ghana's ports.

Although badysts expect this policy to generate revenue gains in the medium term, short-term revenue losses are expected, particularly in the first half of 2019.

The report therefore urged speedy pbadage of the draft tax exemption law introduced in March 2019, which should play a key role in reducing income losses.