STATEMENT BY MINISTRY OF
FINANCE (MOF) IN RESPONSE
TO IEA’S STATEMENT ON
GHANA’S DEBT SITUATION
The Ministry of Finance has taken note
of a Statement by the Institute of Economic Affairs (IEA) and two publications
by Dr. Charles Amo-Yartey (the IMF’s Resident Representative in Sierra Leone
and Liberia) on Ghana’s Public Debt situation. While we take note of some
positive aspects of these publications, the Ministry would also like to issue
the following clarifications in response to several general and sweeping
assertions in them.
All nations borrow for major capital or
infrastructure development; therefore, the current focus of Government Policy
is on “smart-borrowing” to sustain Ghana’s growth and development—without
unduly increasing “pure” public debt. The need for reform has been reinforced
by our attainment of Lower Middle-Income Country (LMIC) status, the persistent
large infrastructure gap reinforced by the expansion of the services and
agricultural sectors, discovery of oil-and-gas and dwindling access to grants
and concessional financing.
The
more relevant question to ask ourselves is how do we meet our energy, road, water, harbour, airport etc. needs
without falling into excessive debt—and at a time when our access to “soft” or
concessional loans will fall substantially over time?
The traditional practice of putting the
total cost of huge infrastructure projects or costs on our Budget has also
failed us woefully over the years. For
example, prior to 2009, a significant value of infrastructure projects (notably
the roads that we now call “Gang of 6”) were put on the national budget.
Indeed, part of today’s fiscal pressure with high cost of domestic debt service
emanates from the Bonds that were issued between 2010 and 2012 to finance these
projects.
The government, therefore, has started
to correct the unsustainability of our traditional debt management approach with
specific strategies that were approved by Cabinet and Parliament in the 2013
through 2015 Budgets (we note that there is no reference to the Budget measures
and policies in the IEA statement and publications). These measures include:
·
Use
of grants and concessional financing:
Since Ghana has become a middle-income country that will gradually lose
substantial access to grants and concessional financing over the medium-to-long
term, the government has decided to channel these resources to finance mainly
social infrastructure, development and protection programs.
·
Commercial
and quasi-commercial projects will be fully or partially “self-financing”:
of Non-concessional or commercial loans will be channeled into projects that
must repay, fully or partially, for the loan from the revenues generated.
·
On-lending
and Escrow (debt service) account policy:
To operationalize the “loan recovery” policy, the Ministry has started signing
On-lending Agreements and opening joint Escrow/Debt Service Accounts with State
Owned Enterprises (SOEs) that cannot borrow on their own Balance Sheet and rely
heavily on the state to guarantee or contract loans on their behalf.
·
Establishment
of Ghana Infrastructure Investment Fund (GIIF):
The Fund will apply market-based principles to the way we contract loans for
commercial infrastructure. The goal is to set up a “rated” agency, borne out of
our Petroleum Wealth Funds under the PRMA (notably the ABFA), that can leverage
the markets to support nation’s borrowing for commercial infrastructure.
·
Establishment
of Sinking Fund Account: In the 2014 Budget,
the government announced that it will “cap” the Ghana Stabilization Fund (GSF),
under the PRMA, at US$250 million to enable it open Debt Service and Sinking
Fund Accounts to start paying down the country’s “bullet” loans—notably,
treasury bills and medium- and long-term domestic and foreign (sovereign)
bonds.
·
Less reliance of Sovereign Guarantees:
Cabinet has approved the setting up of SOE and project debt repayment accounts
as well as the use of alternative loan guarantee and insurance instruments. For
example, the Government recently utilized a share of Ghana’s IDA resources to
apply for the World Bank’s Partial Risk Guarantee (PRG) scheme to support
GNPC’s offtake of gas under the SANKOFA [ENI-VITOL] field’s development.
·
Moratorium on new Loans and Contracts:
Mindful of the increase in public debt—and while in the process of setting up
the alternative policies noted above—the government placed a moratorium on the
award of new contracts and loans, unless approved through an enhanced Cabinet
process.
·
Prudent
public debt computation framework: The policy of recovering loans will extend to
non-commercial infrastructure projects that can make a positive contribution to
loan repayments as well as maintenance or replacement of equipment and other
assets from the fees and charges that consumers pay for the use of goods and
services.
The basis of this “New Debt
Management Policy” lies in the use of commercial loans by SOEs that benefit
from the loans and use them to render services for income and fees. It requires
that they sign On-lending Agreements with, and establish joint Escrow or Debt
Service Accounts with MOF to repay the loans from the fees and charges they
collect from consumers. Once this takes root, we do not have to put the loans
on the taxpayer and bemoan the level of our public debt, even as we develop our
infrastructure.
The IEA trajectory of debt also appears
to ignore the medium-term prospects for the country and, hence, did not make
room for the potentially significant GDP growth. Evidence shows clearly that
the rate of growth and base of Ghana’s GDP went up significantly between 2010
and 2012, mainly due to the rebasing of the GDP, fast growth of the services
sector, increased construction activity, rebound of cocoa production, and
exports of crude oil (for the first time). In this regard, the 2015 Budget
notes that the period from 2015 through 2017/18 will experience further
increase in crude oil and, notably, the advent of gas production.
The cocoa sector also looks very
promising as well as the prospects of the import substitution measures being
implemented in the rice, poultry and pharmaceutical subsectors in line with
President Mahama’s transformation agenda.
Furthermore the analysis fails to
consider the optimum impact of projects such as the Gas Processing Plant at
Atuabo in the Western Region, which has the capacity to supply 120million
standard cubic feet of gas per day from the Jubilee Fields to off takers for
the generation 500MW of power. The Gas Processing Plant will also produce 500tonnes
of Liquefied Petroleum Gas to meet 75% of our present national demand per day.
This project saves GHC500million annually in crude oil imports for the purposes
of firing thermal plants. Potential tax revenue flows into the Petroleum
Holding Funds, especially the Budget Funds under the PRMA has also not been taken into account
by the IEA’s analysis.
We therefore disagree with the IEA’s
dire projection of a debt/GDP ratio that does not take account of potential
rapid GDP growth and the new debt management policy.
The IEA Statement also ignores various
fiscal stabilizers that have become active in a few years only: These include
the establishment of the Stabilization Fund under the Petroleum Revenue
Management Act (PRMA, Act 815), the hedging of crude oil imports and the
National Petroleum Authority (NPA)’s use of a price stabilization margin in the
petroleum price build up. In particular, the Stabilization Fund had accumulated
US$590 million dollars between 2012 and 2014, of which, US$288 million was used
to service our debt and GHC50 million used to start the Contingency Fund under
the Constitution. More importantly, given the fall in crude oil prices and
envisaged decline in petroleum revenues to the Budget, Cabinet has approved the
use of fifty percent (50%) of the Fund to support the Budget, as required by
the PRMA.
Finally, it is erroneous to assert that
Ghana does not have fiscal rules or laws by simply pointing to gaps and
ignoring the overall status quo. Ghana
has a comprehensive statutory framework to support sound debt and public
financial management including the 1992 Constitution (Art. 174 to 189), the
Financial Administration Act (Act 654) and the Financial Administration
Regulations (LI 1802). The BOG law includes limits on borrowing from the central
bank. Furthermore, ECOWAS single convergence criteria—to which Ghana has
subscribed—contains several fiscal rules.
We wish to assure that the Ministry of
Finance is available to provide information to
all researchers who require information to support their work. With this
statement, we believe subsequent publications and commentary thereof will adopt
a symmetrical approach to the subject.
Signed
Hon.
Seth Terkper
(Minister
for Finance)
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