Ghana slips out of debt crisis

Published: 07-SEP-04

Between 1990 and 2001 the external debt of developing countries increased from US$1.4 trillion to US$2.3 trillion. The total external debt of Argentina alone more than doubled to US$137bn by the close of 2001.

In Africa, the external debt servicing as a percentage of exports of goods and services was above 30% for countries in sub-Saharan Africa. Debt servicing as a percentage of exports, however, dropped to 9% in 2001 (sub-Sahara) for some countries, per full year. There must also be a continued macroeconomic stability, which Ghana achieved and subsequentlyqualified to reach the HIPC completion point.

Real HIPC dividends are manifest in the outcome of the completion point, opined Hon. Yaw Osafo-Maafo, the Finance Minister, who is growing more comfortable with the HIPC deal. For example, there has been a reduced pressure on the country’s foreign currency resources as a result of reduced external debt servicing.

Prior to this, the nation’s actual external debt servicing was US$392m (about ¢3.5 trillion) annually; from 1998 to 2000 this dropped to US$149m (¢1.3 trillion). Ghana is expected to retain more than US$268.5 million in 2004 alone. Over the next 20 years, this figure will rise to an estimated US$1.15bn windfall.

Secondly, the adoption of appropriate economic policies designed to facilitate poverty reduction has stimulated economic growth. Consequently, headline inflation dropped from 41% in December 2000 to 11.2% in May 2004.

The banking sector has responded by reducing its lending rates to improve the general business environment and create a stable economy for both micro and small-scale operators to enhance operations.

Thirdly, the country is currently witnessing a positive impact on the balance of payments, with gross foreign reserves shooting to US$1.4bn (almost four months of imports cover). This feat is considered the highest over the last few decades.

Finally, the HIPC programme has enhanced accountability and improved the level of transparency while at the same time, fostering closer relations with creditors and donors globally.

Ghana’s sovereign credit rating currently stands at B+ outlook, which can be seen as a result of good governance practices that are eventually yielding economic rewards and positive gestures reflected in multiple debt relief from nations across the globe.

HIPC relief: a boost for social infrastructure

Since Ghana opted for the HIPC debt relief initiative in March 2001 and reached decision point in February 2002, it has received a total of about ¢2,210.97 billion as at end of June 2004.

Out of this, Government has disbursed a total of ¢1,117.63bn from the HIPC Account to support poverty-related spending bythe Ministries, Departments and Agencies (MDAs), Metropolitan, Municipal and District Assemblies.

For the first half of 2004, a total amount of about ¢734bn was spent to improve education and health services delivery, speed up rural electrification, enhance rural agriculture, feeder roads construction and rehabilitation, rural water and sanitation among others.

The sector recently received over ¢30bn to support the construction of lecture halls, hostels for students and bungalow for lecturers for three universities – University of Ghana, Kwame Nkrumah University of Science & Technology and University of Cape Coast.

An amount of ¢96.3bn was released to upgrade senior secondary schools in selected districts in all ten regions. This support was provided to improve teaching and basic teaching facilities in community secondary schools. Again, more than ¢60bn was released to provide support to farmer groups during the major farming season to boost food production.

Furthermore, the roads ministry received ¢40bn this year for the feeder roads programme to improve access to rural market and health centers.

The Ministry of Health was also given an amount of ¢59.5bn to support the expansion of 21 health training schools, rehabilitate health centers and provide basic equipment for the regional capitals and support for 22 districts under the health insurance schemes. This will help increase geographical and financial access to basic health services in the country. It will also enable the aged, low-income and poor to be assisted to access the health insurance scheme in the district and to make it possible for residents to access health services nationwide.

Government provided an additional amount of ¢95.33bn to Local Government for the support of various projects in the Metropolitan, Municipal and District Assemblies.

Ghana enjoys low-debt-tide

Government, as a matter of policy and strategy, utilises 20% of the HIPC funds to reduce Ghana’s domestic debt. This partly contributed to the reduction in the outstanding stock of Government securities from ¢13,909.4bn in 2002 to ¢13,591.2m in 2003.

In fact, domestic debt as a percentage of GDP has dropped from 28.0% in 2000 to 17.0% in 2004. As the process of domestic debt reduction goes on, domestic interest rates would continue to decline and the private sector can access credit at low cost to spearhead job expansion, employment creation and economic growth.

Ghana now out of debt crisis

On reaching the completion point in July 2004:

• Ghana’s creditors commited irrevocably to deliver debt relief

• Paris Club creditors provided up to 100% debt stock cancellation on all pre-cut-off date loans, and where possible, post cut-off date loans. Ghana’s stock has been reduced by approximately US$1.6bn in nominal terms as a result of stock cancellation from Paris Club creditors, of which Japan is expected to provide about US$880m, Germany US$240m, UK US$140m.

• The country is also due for comparable treatment from our Non-Paris Club creditors and commercial creditors. China will also cancel additional loans.

• Multilateral creditors, on the other hand, will continue to provide the debt reduction they started at the decision point. Total relief to be provided by the World Bank alone is about US$1.45bn, African Development Bank US$160m and IMF US$112m in NPV (net present value) terms.

• Ghana would save approximately $230m annually in debt service costs over the next 20 years. In line with the significant debt reduction, the debt service-to-exports and debt servicesto- revenue ratios will average 4.7 and 6.2% respectively over the next 20 years. These compare favourably with the 10-year aver-age pre-HIPC debt service levels of 21 and 30% respectively.

• In sum, total debt relief from all of Ghana’s creditors amounts to US$4.5bn in nominal terms. This relief is equivalent to a reduction in net present value terms of US$2.2bn as agreed at the decision point.

In response to the gesture exhibited by the IMF and the Bank, the Paris Club of creditors has also announced a cancellation of Ghana’s debt by US$1.6bn. With this gesture, Ghana only owes US$300m to the Paris Club.

Ghana’s debt management has gained centre stage within the sub-region as its success story is now serving as a motivation for some bigger economies to also opt for the initiative.

It is however hoped that the government will abide by the GPRS framework to set its development agenda right and bright for Ghana.

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