Government’s 2015 debt plan — which was announced in the central bank’s issuance calendar for the first half of the year — is set to further crowd out the private sector from the credit market, as government’s deficit financing from the domestic economy goes up by 50 percent from the 2014 figure.
The Bank of Ghana last week served notice that it will issue GH¢25.4billion of debt in the first half of the year, GH¢8.6billion of which will be used to finance the country’s projected GH¢8.8billiion budget deficit.
Last year, domestic financing for government’s deficit stood at GH¢5.7billion, out of a total deficit of GH¢10.9billion.
The 50 percent jump in deficit financing from domestic sources, according to analysts, will increase the government’s stranglehold on the credit market — ultimately outmuscling the private sector from the market by way of increasing the cost of borrowing.
Currently, the short-term borrowing cost of government stands at more than 25 percent, and some analysts who spoke to the B&FT anticipate that the high debt to be issued will put further upward pressure on interest rates.
Yaw Adu-Koranteng, a research analyst at NDK Asset Management, told the B&FT: “The market will always have the appetite for such instruments, but it will have to be enticed by government to subscribe to them…which is also likely to see the cost moving up.
“The government is expected to issue instruments in excess of about GH¢7billion against maturities for the period, as contained in the calendar. This gives a signal that government is in need of funds to finance its projects, and it is likely to see an increase in cost of funds,” he added.
He also pointed to a further squeezing of the private sector as government borrowing raises interest rates. “With government issuing basically riskless securities, the private sector will have to pay a premium for their level of individual risk…and this is likely to affect the level of private sector growth in the country,” Adu-Koranteng said.
Sampson Akligoh, an economist and the MD of investment banking firm InvestCorp, said the increase in government’s domestic borrowing “will definitely add some interest rate pressures, but the most worrying is its effects on private sector credit”.
Bank loans to the private sector come at a high average interest rate of 28 percent, according to Bank of Ghana data, and the Association of Ghana Industries has always listed high cost of credit as one of the major drawbacks to businesses operating in the country.
The high interest rates on the back of increased government borrowing will most likely affect business expansion and limit the ability of firms to create new jobs, in an economy where unemployment has reached alarming heights.
Apart from the adverse implications on the private sector, hikes in already high interest rates will put further strain on government’s interest expenditure, which shot up by an annual average of 81 percent between 2012 and 14, rising from GH₵2.4billion to GH₵7.8billion.
This year interest expenditure of government is estimated at GH₵9.58billion, a 22 percent jump over 2014. As a share of tax revenue, interest expenditure has shot up from 20 percent in 2012 to 40 percent in 2014.
This means that the amount of tax revenue devoted to debt servicing has doubled in just about two years.
NDK’s Adu-Koranteng — commenting on the implication of government’s borrowing on its macro-economic targets — said the public debt is likely to be increased, which will have further implications on the cost of borrowing.
Mr. Akligoh also said uncertainty about the macroeconomic targets is evident in the market, with foreign investors seeking clear guidance on the upcoming IMF programme.
“There is still some degree of uncertainty and concerns about clear guidance toward an IMF programme, mainly on the part of foreign investors. The approach to building fiscal buffers is key for policy credibility in the short-term, and l think the consensus is that engaging the IMF will buy time for Ghana. I think if Ghana is able to control currency depreciation this year, interest rate increases can be contained; especially for longer-dated instruments.”
source : B&FT