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Ghana: Request for a Three-Year Arrangement Under the Extended Credit Facility—Debt Sustainability Analysis

Author(s):
International Monetary Fund. African Dept.
Published Date:
April 2015
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A. Background and Macroeconomic Assumptions

1. Ghana’s public debt has steadily increased over the past decade, largely through the issuance of local currency-denominated domestic debt. Against the backdrop of large and sustained budget financing needs, Ghana’s domestic debt market has doubled relative to its GDP over the decade. Further, as a rapidly growing frontier market, Ghana has increasingly attracted foreign investors in the domestic debt market since they opened up the market to nonresidents in 2006.4 External debt also increased gradually including through a series of Eurobond issuances under the relatively benign international financial conditions. The larger increase in external debt (as a percentage of GDP) in 2014 is mainly attributable to a large depreciation of local currency. To reflect properly the increasing vulnerabilities associated with nonresidents’ holdings of domestic debt, this DSA uses the residency criterion instead of the currency criterion for defining external debt that was used in the previous DSA. Hereafter, public external debt covers external debt of the central government (including domestic debt held by nonresidents), the main state-owned enterprises (SoEs), and credit facilities contracted by the central bank for a reserve management purpose.5

2. The starting point for the macro-economic assumptions is broadly less favorable than the last Article IV DSA (see Box for detailed discussions on assumptions). Revisions reflected updated information on the timing of oil production and a worsening in key variables at the start of the projection year, as a result of (i) sharper depreciation in the local currency in 2014; (ii) higher costs of borrowing, consistent with tightened financial conditions and higher inflation; and (iii) a downward revision in real GDP growth in the near term; and (iv) larger fiscal deficit. As a result, several of Ghana’s public domestic and external debt indicators for 2014 have deteriorated since the last full DSA.

Table. Key Macroeconomic Assumptions
201420152015–202021–34
Real GDP Growth(annual percentage change)
DSA-20144.85.46.24.7
Current DSA4.23.55.85.7
Inflation (GDP deflator)(annual percentage change)
DSA-201413.111.29.66.6
Current DSA14.713.69.27.0
Real interest rate (foreign debt)(percent)
DSA-20142.42.32.73.8
Current DSA5.03.92.94.7
Current account balance(in percent of GDP)
DSA-2014−10.6−7.8−6.9−6.0
Current DSA−9.2−7.0−5.2−4.5
Primary fiscal balance(in percent of GDP)
DSA-2014−3.6−2.7−0.1−0.3
Current DSA−3.1−0.31.50.4

3. The envisaged consolidation strategy under the program is expected to have a stabilizing effect on macroeconomic conditions. Non-oil output growth is set to slow from 4.1 in 2014 to 2.3 percent in 2015 reflecting fiscal and monetary tightening, and power shortages but is forecast to recover gradually and reach 5.5 in 2017. The non-oil sector is projected to grow at an average of 6.4 percent from 2018 onwards. Inflation is expected to slowdown to single digits by 2016 and would reach a lower level in the long term.

Box. Baseline Macroeconomic Assumptions

Real GDP-growth: Real growth has declined to a projected 3.5 percent in 2015, due mainly to fiscal consolidation under the program, a significant decrease in oil prices, and power shortages owing to low water levels in hydro power stations and delayed coming on stream of new power plants. Growth is projected to pick up in 2016 onwards. In the long run, real growth is assumed to stabilize at around 5.7 percent, with new oil discoveries and gas production implying significant upside potential. Non-oil growth is set to decelerate to 2.3 percent in 2015 and pick up to 4.7 percent in 2016, with a long-run steady-state growth rate of 6.5 percent.

Inflation: Inflation reached 17 percent in 2014 and is projected to remain at two-digit levels in 2015. Power shortages might weigh on BoG’s efforts to reduce inflation in the near term. However, as fiscal dominance of monetary policy subsides under the fiscal consolidation program, including the elimination of central bank financing to the government by 2016, and BoG restores the effectiveness of its inflation targeting monetary policy framework, inflation should move back to close to BOG’s medium-term target of 8 ±2 percent. Inflation rates are projected to converge to around 7 percent over the projection period.

Government balances: The overall cash fiscal balance has been elevated at 9.4 percent of GDP in 2014, with interest expenditures amounting to some 6 percent of GDP. The program envisages an upfront and ambitious fiscal consolidation, including a decline in real wages and a strict payroll scrutiny and limited net hiring, combined with several tax measures. The already-approved 2015 budget envisages adjustments equivalent to some 3 percentage points of GDP. The government is planning to take additional measures to address the revenue shortfall due to lower oil prices in the near-term, while the expected longer-term recovery in oil prices and increased oil/gas production will contribute to maintaining the overall deficits at a sustainable level. The primary surplus is projected to converge close to zero percent of GDP in the long-run.

Current account balance: Over the past years the current account deficit has been unsustainably high at around 10 percent of GDP. The impact on the current account of recent declines in oil prices would be relatively small given that Ghana still imports significant amount of refined oil. With the tightening of fiscal and monetary policies, the current account deficit would improve to about 5 percent of GDP in 2017. In the long-run, with increased oil/gas production and an improvement in oil prices, the deficit is projected to decline gradually to some 3 percent of GDP. Gross international reserves would reach the authorities’ target of 4.2 months of imports in 2017 and build up steadily in the outer period to higher levels.

Financing flows: Ghana has enjoyed high FDI inflows over the past years, even under increasing uncertainties surrounding the Ghanaian economy, reaching 8.7 percent of GDP in 2014, mainly driven by the hydrocarbon sector. Thanks to a discovery of new fields, FDI is projected to stay close to 7½ percent of GDP in the medium term, and then gradually decline towards around 3 percent of GDP in the long run. Consistent with Ghana’s improving income status and wealth, inflows from grants are projected to decline to less than 1 percent of GDP in the medium to long term. Borrowing is projected to become increasingly nonconcessional and these loans are expected to be used for key infrastructure projects to bring up potential growth rate. A series of issuances of Eurobonds are assumed to rollover maturing Eurobonds, which are assumed to be repaid in amortization payments rather than a bullet payment as with the 2014 Eurobond.

4. Stable oil production and the onset of natural gas production in 2015 will boost hydrocarbon growth to 22 percent, partly offsetting the deceleration in the non-oil sector. Crude oil production is projected to increase from 37 million barrels per year in 2014 to 76 million in 2017, and an average of 82 million barrels during 2018–20. Based on the latest WEO projections, the price of oil is projected to decrease to around US$50–55 in 2015 and subsequently recover to around US$70 per barrel by 2019; prices are assumed to stabilize at this level over the medium term in real terms.

B. External Debt Sustainability Analysis

5. Under the baseline which is consistent with the Fund’s program, all the indicators but debt service-to-revenue ratio would remain under the thresholds comfortably. The PV indicators jump in 2015 and subsequently decrease to sustainable levels over the projection period. Compared with the last DSA, all PV indicators would be worse at the end of the projection. Due to the change of the criterion for external debt, debt services increased to some extent, leading to a worsening of debt-services related indicators.

6. Under the baseline, the external debt service-to-revenue ratio would breach its indicative threshold in the long term for a protracted period. Without assuming proactive measures to smooth the amortization of the 2007, 2013, and 2014 Eurobonds, the indicator would hover around the threshold, with large breaches in some years.

7. The debt outlook is particularly sensitive to shocks to nominal exchange rates and net non-debt creating flows. Although the breach would still be small and temporary except for the debt service-to-revenue ratio, the relevant debt indicators tend to be worst and the most extreme (in 2024) under standard shocks to exchange rates and net non-debt creating flows. Under the historical scenario where the current account deficit remains at around 8 percent of GDP and net FDIs are quite low—compared with the last 5 years—at 5.6 percent of GDP over the projection period, four indicators would breach the thresholds. Historical scenario suggests the PV to debt-to-GDP ratio would also exceed the threshold in addition to the debt service-to-revenue ratio mainly due to sustained larger current account deficits than in the baseline.

8. Ghana has been able to tap the international bond market three times since its debut issuance in 2007. Ghana, along with other frontier markets, has taken advantage of historically low underlying benchmark US Treasury yields to issue its international sovereign bonds in the last couple of years. The issuance of the international bond in 2014 was successful from a market perspective; it attracted considerable investor interest and was oversubscribed against the backdrop of generally low market volatility. However, its yield, at 8.1 percent (with spread of around 550bp), was higher than for bonds issued in the recent past by other SSA countries. Spreads on existing bonds had increased in October 2014 like many other frontier and emerging markets, with a peak of over 850bp in December 2014, and subsequently declined to around 650bp in February 2015.

9. The large central bank swap operations also present considerable risks. These dollar-denominated short-term obligations have recently been rolled over on a continuous basis, which creates additional risk to debt sustainability. BoG plans to unwind these swap operations gradually, especially since some local banks have external liabilities underpinning swaps with BoG.

10. The stock of external debt contracted by State Owned Enterprises (SOEs) without government guarantee is limited. Except for the national oil company, SOEs have limited ability to tap international resources without government guarantee, and most of their external debt is contracted by the central government and subsequently on-lent to them, or guaranteed by the central government. In addition to government and government-guaranteed debt, this DSA incorporates non government-guaranteed external debt contracted by a SoE, which amounted to some USD 200 million at end-2014. The use of residency basis partly masks SoE’s vulnerabilities associated with their large foreign currency-denominated liabilities from resident banks. 6

11. Holdings of domestic debt instruments by non-residents present roll-over and foreign exchange risks caused by accompanying capital outflows. Non-residents are allowed to participate in the medium- to long-end of the market (bonds with maturities of 3-year and higher). The share of domestic debt held by non-residents has fluctuated around 20 percent of total domestic debt. Domestic bonds of Ghc 1.8 billion and 1.3 billion are coming due in 2015 and 2016, respectively, which could have negative implications for the balance of payments.

C. Public Debt Sustainability Analysis

12. Ghana’s total public debt dynamics would improve under the program (Table 4, Figure 3). The program assumes more ambitious and frontloaded fiscal consolidation measures than the original authorities’ homegrown consolidation strategy. This implies a large reduction in the 2015 fiscal primary deficit (of about 4½ percentage points of GDP on a commitment basis), leading to an overall deficit on a commitment basis of about 2¼ percent of GDP in 2017 (corresponding to a non-oil primary surplus of about 1 percent of GDP, with a cumulative 5.6 percentage points of GDP improvement from 2014), with subsequent changes driven primarily by the profile for oil revenues. Owing to the envisaged front-loaded and more ambitious fiscal consolidation under the program, as well as improved domestic and external borrowing conditions (in line with the external debt sustainability assessment), the total public debt service-to-revenue ratio (including payments on external and domestic debt) would also improve despite worsened initial conditions. It is projected to stabilize at around 40 percent in the long run.

Table 1.Ghana: External Debt Sustainability Framework, Baseline Scenario, 2011–2034 1/(In percent of GDP, unless otherwise indicated)
ActualHistorical 6/Standard 6/Projections
AverageDeviation2014–20192020–2034
201120122013201420152016201720182019Average20242034Average
External debt (nominal) 1/29.134.134.947.447.647.345.644.444.040.730.6
of which: public and publicly guaranteed (PPG)23.628.930.441.843.643.341.640.440.036.726.6
Change in external debt2.95.00.812.50.2−0.3−1.7−1.2−0.4−1.1−0.7
Identified net debt-creating flows−4.12.20.4−1.3−2.1−4.1−6.6−5.9−4.9−2.6−0.2
Non-interest current account deficit7.910.29.87.82.46.74.94.63.12.82.62.82.42.4
Deficit in balance of goods and services12.412.413.09.610.48.86.65.95.76.54.8
Exports36.940.133.438.933.234.535.835.934.930.326.7
Imports49.352.546.348.543.743.242.441.740.536.731.5
Net current transfers (negative = inflow)−6.6−5.7−4.0−7.61.8−4.9−5.9−5.8−5.2−4.9−4.7−3.7−2.0−3.2
of which: official−0.6−0.6−0.20.0−0.7−0.10.0−0.10.00.00.0
Other current account flows (negative = net inflow)2.13.60.81.90.41.61.71.91.60.0−0.5
Net FDI (negative = inflow)−8.1−7.9−6.6−5.63.4−8.7−7.5−7.5−7.5−7.5−7.5−5.4−2.6−4.6
Endogenous debt dynamics 2/−3.8−0.1−2.70.70.5−1.1−2.1−1.20.00.00.1
Contribution from nominal interest rate1.01.52.02.52.11.71.81.71.82.21.9
Contribution from real GDP growth−3.0−2.2−2.2−1.8−1.6−2.8−3.9−2.9−1.8−2.2−1.8
Contribution from price and exchange rate changes−1.90.6−2.5
Residual (3–4) 3/7.02.80.313.82.33.74.94.74.51.5−0.5
of which: exceptional financing0.00.00.00.00.00.00.00.00.00.00.0
PV of external debt 4/32.443.140.840.839.339.139.438.229.2
In percent of exports97.2110.8122.8118.3109.8109.1112.9126.0109.3
PV of PPG external debt28.037.536.836.835.335.135.434.225.2
In percent of exports83.896.4110.7106.798.697.9101.4112.894.3
In percent of government revenues172.7210.2202.5195.1180.8172.8173.0171.5130.7
Debt service-to-exports ratio (in percent)9.710.112.118.122.415.217.614.113.120.220.6
PPG debt service-to-exports ratio (in percent)6.77.29.414.819.113.015.612.110.917.717.9
PPG debt service-to-revenue ratio (in percent)14.316.819.432.334.923.828.621.318.627.024.8
Total gross financing need (Millions of U.S. dollars)1322.42688.83480.52291.92010.6981.3886.4201.8−212.62650.88978.4
Non-interest current account deficit that stabilizes debt ratio5.05.29.0−5.84.74.94.84.02.93.83.1
Key macroeconomic assumptions
Real GDP growth (in percent)14.08.07.37.42.74.23.56.49.26.94.45.85.66.35.7
GDP deflator in US dollar terms (change in percent)7.8−1.97.98.310.4−23.6−1.92.01.61.92.0−3.02.12.12.1
Effective interest rate (percent) 5/4.95.56.74.21.75.74.63.84.24.04.44.55.66.76.0
Growth of exports of G&S (US dollar terms, in percent)54.715.2−3.618.515.6−7.3−13.312.615.49.13.43.36.46.96.0
Growth of imports of G&S (US dollar terms, in percent)39.412.82.319.314.9−16.7−8.77.48.87.23.40.35.66.56.1
Grant element of new public sector borrowing (in percent)−2.35.35.80.8−12.2−13.8−2.7−13.9−14.9−14.3
Government revenues (excluding grants, in percent of GDP)17.317.216.217.818.218.919.520.320.419.919.319.7
Aid flows (in Millions of US dollars) 7/800.5646.1224.0526.3825.8878.6754.3407.0330.9126.254.3
of which: Grants800.5646.1224.0277.2568.2514.2404.3407.0330.999.810.7
of which: Concessional loans0.00.00.0249.1257.6364.4350.00.00.026.443.6
Grant-equivalent financing (in percent of GDP) 8/0.61.81.60.90.20.0−0.5−0.6−0.5
Grant-equivalent financing (in percent of external financing) 8/7.622.221.812.63.51.1−10.9−14.7−11.7
Memorandum items:
Nominal GDP (Millions of US dollars)39565.041939.348586.038647.739218.842527.147214.551436.854728.976382.3171248.3
Nominal dollar GDP growth23.06.015.8−20.51.58.411.08.96.42.67.98.67.9
PV of PPG external debt (in Millions of US dollars)12067.413279.313928.015075.916182.317580.418872.825514.842166.3
(PVt-PVt-1)/GDPt-1 (in percent)2.51.72.92.63.02.52.51.91.51.7
Gross workers’ remittances (Millions of US dollars)1941.61760.21523.91531.81685.01726.21765.11803.01839.92036.22394.7
PV of PPG external debt (in percent of GDP + remittances)27.136.035.335.434.133.934.233.324.8
PV of PPG external debt (in percent of exports + remittances)76.687.598.095.589.389.292.5103.789.6
Debt service of PPG external debt (in percent of exports + remittances)8.613.416.911.714.111.010.016.317.0
Sources: Country authorities; and staff estimates and projections.
Table 2.Ghana: Public Sector Debt Sustainability Framework, Baseline Scenario, 2011-2034(In percent of GDP, unless otherwise indicated)
ActualEstimateProjections
201120122013Average 5/Standard 5/ Deviation2014201520162017201820192014–19 Average202420342020–34 Average
Public sector debt 1/42.649.656.370.372.270.064.860.658.050.638.9
of which: foreign-currency denominated23.628.930.441.843.643.341.640.440.036.726.6
Change in public sector debt0.37.06.614.01.9−2.2−5.1−4.2−2.6−1.1−0.8
Identified debt-creating flows−4.36.94.211.70.4−1.6−5.1−3.6−2.2−0.6−0.4
Primary deficit1.48.65.53.62.82.70.1−0.3−1.9−2.2−2.4−0.7−0.3−0.1−0.6
Revenue and grants19.318.716.718.519.620.120.421.121.020.119.3
of which: grants2.01.50.50.71.41.20.90.80.60.10.0
Primary (noninterest) expenditure20.627.322.221.219.719.818.518.918.719.819.2
Automatic debt dynamics−6.4−1.6−1.39.10.3−1.4−3.1−1.30.1−0.4−0.3
Contribution from interest rate/growth differential−5.2−3.0−1.70.31.0−1.4−3.1−1.30.1−0.4−0.3
of which: contribution from average real interest rate0.00.11.72.53.32.92.82.92.72.42.1
of which: contribution from real GDP growth−5.2−3.2−3.4−2.2−2.4−4.3−5.9−4.2−2.5−2.7−2.4
Contribution from real exchange rate depreciation−1.21.40.38.8−0.60.00.00.00.0
Other identified debt-creating flows0.8−0.10.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)1.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)−0.2−0.10.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes4.60.12.52.31.5−0.6−0.1−0.7−0.4−0.4−0.4
Other Sustainability Indicators
PV of public sector debt53.866.065.363.558.655.353.448.137.5
of which: foreign-currency denominated28.037.536.836.835.335.135.434.225.2
of which: external28.037.536.836.835.335.135.434.225.2
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/14.120.519.724.225.922.520.417.415.014.412.9
PV of public sector debt-to-revenue and grants ratio (in percent)323.2355.9333.1316.3287.2262.0253.6239.7194.3
PV of public sector debt-to-revenue ratio (in percent)332.4370.2359.6336.6299.8272.2261.1241.3194.4
of which: external 3/172.7210.2202.5195.1180.8172.8173.0171.5130.7
Debt service-to-revenue and grants ratio (in percent) 4/39.839.752.975.778.963.964.453.245.944.840.3
Debt service-to-revenue ratio (in percent) 4/44.543.254.478.885.268.067.255.347.345.140.3
Primary deficit that stabilizes the debt-to-GDP ratio1.01.6−1.1−11.3−1.81.93.22.00.20.80.7
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)14.08.07.37.42.74.23.56.49.26.94.45.85.66.35.7
Average nominal interest rate on forex debt (in percent)6.66.37.94.32.16.25.24.14.64.44.84.96.27.66.7
Average real interest rate on domestic debt (in percent)−3.7−4.80.1−1.84.14.77.07.37.79.48.57.47.15.66.0
Real exchange rate depreciation (in percent, + indicates depreciation)−7.06.11.2−4.18.128.8
Inflation rate (GDP deflator, in percent)13.916.617.417.04.614.713.69.78.88.07.510.46.96.97.0
Growth of real primary spending (deflated by GDP deflator, in percent)12.242.9−12.94.314.8−0.2−4.07.01.99.33.22.97.86.25.8
Grant element of new external borrowing (in percent)−2.35.35.80.8−12.2−13.8−2.7−13.9−14.9
Sources: Country authorities; and staff estimates and projections.
Table 3.Ghana: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2014-2034(In percent)
Projections
20142015201620172018201920242034
PV of debt-to GDP ratio
Baseline3737373535353425
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014–2034 1/3738414651555431
A2. New public sector loans on less favorable terms in 2014–2034 23737383838383935
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015–20163735363434353425
B2. Export value growth at historical average minus one standard deviation in 2015–2016 3/3728252424253024
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015–20163736373636363526
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015–2016 4/3742484646463825
B5. Combination of B1-B4 using one-half standard deviation shocks3725171717182522
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/3751514949504835
PV of debt-to-exports ratio
Baseline96111107999810111394
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014–2034 1/96113120128142158178116
A2. New public sector loans on less favorable terms in 2014–2034 296111111106106110130132
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015–20169610710396959911092
B2. Export value growth at historical average minus one standard deviation in 2015–2016 3/9672676263659183
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015–20169610710396959911092
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015–2016 4/9612613812812713112594
B5. Combination of B1-B4 using one-half standard deviation shocks9664444142447271
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/9610710396959911092
PV of debt-to-revenue ratio
Baseline210202195181173173171131
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014–2034 1/210207219235250269271160
A2. New public sector loans on less favorable terms in 2014–2034 2210203202194187188198183
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015–2016210193189176169169168128
B2. Export value growth at historical average minus one standard deviation in 2015–2016 3/210156133124120121150126
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015–2016210196196183175176175133
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015–2016 4/210230253235224224190130
B5. Combination of B1-B4 using one-half standard deviation shocks21013993878687127114
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/210282271253242243242184
Debt service-to-exports ratio
Baseline1519131612111818
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014–2034 1/1517111412112419
A2. New public sector loans on less favorable terms in 2014–2034 215191212981824
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015–20161519131612111818
B2. Export value growth at historical average minus one standard deviation in 2015–2016 3/151611131081116
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015–20161519131612111818
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015–2016 4/1519141814132418
B5. Combination of B1-B4 using one-half standard deviation shocks151591076714
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/1519131612111818
Debt service-to-revenue ratio
Baseline3235242921192725
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014–2034 1/3230212521193626
A2. New public sector loans on less favorable terms in 2014–2034 23235222315142834
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015–20163234242921192725
B2. Export value growth at historical average minus one standard deviation in 2015–2016 3/3235212518161924
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015–20163235253022192826
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015–2016 4/3235263225223626
B5. Combination of B1-B4 using one-half standard deviation shocks3232192215131322
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/3250344131273936
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/−16−16−16−16−16−16−16−16
Sources: Country authorities; and staff estimates and projections.
Table 4.Ghana: Sensitivity Analysis for Key Indicators of Public Debt 2014-2034
Projections
20142015201620172018201920242034
PV of Debt-to-GDP Ratio
Baseline6665635955534837
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages66676971747792122
A2. Primary balance is unchanged from 201466687070727696127
A3. Permanently lower GDP growth 1/6666656058575972
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2015–20166664645956544939
B2. Primary balance is at historical average minus one standard deviations in 2015–20166672787370686556
B3. Combination of B1-B2 using one half standard deviation shocks6669746864625642
B4. One-time 30 percent real depreciation in 20156683817674737894
B5. 10 percent of GDP increase in other debt-creating flows in 20156677757067656152
PV of Debt-to-Revenue Ratio 2/
Baseline356333316287262254240194
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages356342344349352368460634
A2. Primary balance is unchanged from 2014356348348343342363480657
A3. Permanently lower GDP growth 1/356336322296274270292376
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2015–2016356329317288263255244203
B2. Primary balance is at historical average minus one standard deviations in 2015–2016356369389358330324323291
B3. Combination of B1-B2 using one half standard deviation shocks356354367334306297279216
B4. One-time 30 percent real depreciation in 2015356425406374350349390487
B5. 10 percent of GDP increase in other debt-creating flows in 2015356390373342315309305270
Debt Service-to-Revenue Ratio 2/
Baseline7679646453464540
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages76766367585574109
A2. Primary balance is unchanged from 201476796567585679116
A3. Permanently lower GDP growth 1/7679646554485168
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2015–20167678646453464541
B2. Primary balance is at historical average minus one standard deviations in 2015–20167679677160586157
B3. Combination of B1-B2 using one half standard deviation shocks7677656957545345
B4. One-time 30 percent real depreciation in 201576877680666177103
B5. 10 percent of GDP increase in other debt-creating flows in 20157679707058595653
Sources: Country authorities; and staff estimates and projections.

13. PV of debt-to-GDP ratio remains below public debt benchmark by comfortable margins, but stress tests suggest deteriorations in relevant indicators. Under the baseline scenario all indicators show sustainable paths whereas they could be on an explosive path under the historical and the most extreme shock scenario. Again, the indicators are sensitive to a shock to real exchange rate depreciation.

14. Cost and rollover risk of domestic debt are increasing. Interest rates of both 91 and 182-day treasury bills increased by around 700 basis points (to about 26 percent) in 2014. The share of domestic debt in short term maturities (less than 1 year) has increased from 45 percent as of end-2013 to 56 percent as of end-2014, increasing rollover risk.

15. Domestic arrears represent an additional risk factor to public debt sustainability. The total stock of outstanding arrears rose from GhC. 5.2 billion in 2011 to about GhC. 6.2 billion in 2014, and the authorities are planning to eliminate all domestic arrears by end-2017. The bulk of these arrears are concentrated in the SOEs and the statutory funds.

D. Conclusion

16. Although Ghana is now assessed to be at a high risk of debt distress, active debt management and ambitious fiscal consolidation under the program should improve its debt sustainability. The standardized exercise shows that only one external debt indicator, debt service-to-revenue ratio, would breach the policy-dependent threshold under the assumptions embedded in the ECF-supported program. Proactive debt management policies reinforced by envisaged revenue enhancement measures could improve this indicator over the medium and long run. As illustrated in stress scenarios, both external and public debt could follow an explosive path, inter-alia, under shocks to exchange rates and capital inflows. Sound macroeconomic management and structural adjustment to enhance growth would also be key to bringing debt firmly on a sustainable path.

17. Any sizable deviation from the ambitious fiscal consolidation program would decisively stall the projected decline in the public debt path. Total public debt is already at high levels by international standards and will keep rising on an unsustainable path with unchanged policies. The key downside risks will then be that banks’ appetite for government debt would wane, financing needs would rise to levels that cannot realistically be met, domestic arrears would increase, and interest costs would rise further adding to the debt burden. External financing gaps would open up with pressure on the exchange rate eventually leading to a further significant depreciation as well as abrupt adjustment in the fiscal position.

18. Furthermore, the bullet feature of Eurobonds accentuates Ghana’s roll-over risk, since the principal repayment falls in one specific year or within a short period of time7, unlike amortizing debt instruments for which the principal repayment is distributed over a longer time horizon. In particular, Ghana will face the risk that benchmark US Treasury yields will be much higher (as US economic conditions normalize and monetary policy is tightened). In that context, risk appetite from international investors could be very different from current conditions and Ghana might not be able to roll-over the needed amounts in the future.

19. Ghana’s government faces large gross financing needs (GFN). High GFN, defined as the primary deficit plus the stock of short-term debt at the end of the last period, is an indication of the exposure to liquidity risks, including rollover needs associated with sovereign Bonds. The average level of total GFN for Ghana will peak in 2015 at 26 percent of GDP, well above the benchmark of 15 percent of GDP for EM countries and higher than in other market-access LICs, before subsequently declining to 13 percent towards the end of projection.

20. The authorities broadly concurred with the staff’s views on debt sustainability analysis with some caveats. The authorities are concerned about the bullet repayments of Eurobonds and agreed on the importance of having realistic medium- and long-term debt management strategy along with fiscal consolidation. In their view, the analysis underestimates the potential of higher hydrocarbon production, including gas production coming on stream in the next few years, which would boost government revenues in the long-run. Also, they believe that the revised debt management strategy to be adopted by mid-2015, including the use of a sinking fund, would restore the confidence in the market and reduce the interest costs associated with Eurobonds.

Figure 1.Ghana: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2014-2034 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in 2024.

Figure 2.Ghana: Indicators of Public Debt Under Alternative Scenarios, 2014-2034 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.

2/ Revenues are defined inclusive of grants.

Prepared in collaboration with Ghanaian authorities. The previous DSA was prepared in April 2014 (IMF Country Report No. 14/129).

The World Bank’s Country Policy and Institutions Assessment (CPIA) ranks Ghana as a strong performer (the average CPIA in 2011–13 is 3.79). Thus, the external debt burden thresholds for Ghana are (i) PV of debt-to-GDP ratio: 50 percent; (ii) PV of debt-to-exports ratio: 200 percent; (iii) PV of debt-to-revenue ratio: 300 percent; (iv) debt service-to-exports ratio: 25 percent: and (v) debt service-to-revenue ratio: 22 percent. Given its CPIA is just above the threshold for a high performer (3.75), a deterioration in the CPIA score would further worsen the assessment due to the lowering of these thresholds.

This DSA uses the residency criterion for defining external debt to better capture domestic debt held by nonresidents. The use of the currency criterion (as in the previous DSA) would not change the risk of debt distress.

Nonresidents can purchase domestic bonds with a maturity of 3 years or longer.

These BoG liabilities do not include swaps contracted with resident banks. A credit line with BIS has also been excluded from the analysis since it is fully collateralized.

SOEs have significant amount of USD denominated obligations with resident commercial banks and possible USD-denominated arrears associated with their commercial activities, the total of which could exceed USD 1 billion.

The 2014 Eurobond has a soft repayment structure over 3 years (i.e. over 2024–26)

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