Chapter

3 Ghana: The Burden of Debt-Service Payment Under Structural Adjustment

Editor(s):
Mohsin Khan, and Simeon Ajayi
Published Date:
May 2000
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Author(s)
Barfour Osei

Many sub-Saharan African countries face a serious external debt problem. The severity of the problem is seen from the size of the current debt relative to income, and from the high debt-service payments. From an estimated total of $6 billion at the end of 1970, the external debt of sub-Saharan African countries rose to an estimated $161 billion at the end of 1990 (World Bank, 1991b), representing over 110 percent of GNP. Debt service also rose from under $1 billion a year to over $10 billion, representing about 25 percent of export earnings. The huge expansion in the size of the debt relative to income not only can lead to capital flight but can also discourage future external funding for development in the region. High debt service means that a significant proportion of convertible currency is consumed by debt, thereby limiting countries’ ability to import goods and services. Debt service also constitutes a considerable share of the budget in many countries and so imposes significant constraints on domestic investment.

The size of the current debt and of debt-service payments is compounded by the great poverty and serious structural weaknesses of sub-Saharan African economies. Structural weaknesses such as lack of a diversified export base make it more difficult for these countries to adjust to changing world economic conditions. Also, higher population growth in these countries makes achieving higher per capita income growth more difficult. These weaknesses prevent these countries from achieving the rapid economic growth necessary to escape from debt difficulties.

Beginning in the early 1980s, many sub-Saharan African countries embarked on structural adjustment. A dominant economic issue is how far the debt problem obstructs the drive toward rapid and sustainable growth. It is recognized that the debt problem varies not only between groups of countries, but also among countries within the same group. Therefore, proper understanding of the debt problem would necessarily require in-depth analysis of the situations in individual countries, followed by a synthesis of lessons from particular experiences. This chapter on Ghana intends to develop that understanding and synthesis.

The purpose of this chapter is to explore in detail the implications of Ghana’s external indebtedness for sustained economic growth. The focus of the analysis is on debt in the 1983–90 period, during which Ghana pursued an Economic Recovery Program (ERP) and adopted structural adjustment policies. Where necessary, data are drawn from outside this period for comparative analysis. Specific issues addressed include

  • the main features of the debt, including the size, type, sources, structure, and terms;

  • the debt burden and the causes of the present debt difficulties;

  • the sustainability of the debt; and

  • the impact of the debt on economic growth.

The main objective is to provide a better understanding of Ghana’s debt problem in order that adequate and effective debt management measures can be sought.

The chapter is divided into six sections. The section following this introduction provides background information. It examines Ghana’s economic structure and performance and traces the accumulation of debt before the inception of the ERP. This section also discusses the dimensions of the debt. The next section assesses the debt burden and the causes of the current debt difficulties. The section after that tackles the issue of debt sustainability and fiscal stability. The impact of the debt on long-term economic growth is assessed in the final section before the conclusion.

Background

The Ghanaian Economy: Structure, Performance, and Debt Accumulation

A useful starting point in studying Ghana’s present debt problems is to look at the economy’s performance, its structural change, and past debt accumulation, since the present debt problems cannot be divorced from any of these.

The Ghanaian economy suffered a protracted decline in the three decades following independence in 1957, particularly in the 1970s and early 1980s. Output grew at a modest 2.2 percent a year between 1960 and 1970 (Table 1) but declined at a rate of 0.5 percent a year during the following decade. With a fast-growing population, Ghana moved from classification as a middle-income country in the 1960s to that of a low-income country by the end of the 1970s.

Table 1.Ghana: Selected Macroeconomic Indicators, 1960–70, 1975, and 1980–90(In percent of GDP except as noted)
1960–70197519801981198219831984198519861987198819891990
Growth rate of GDP
(in percent a year)2.2–12.40.5–3.5–6.9–4.68.65.15.24.85.65.13.0
Inflation (in percent a year)2.029.850.2116.522.3122.839.710.324.639.831.425.037.1
National accounts
Consumption888793959696989493.692.294.593.893.3
Gross domestic investment12.75.64.63.43.76.99.69.410.410.313.515.1
Gross domestic saving9.64.54.03.73.35.67.67.78.210.76.010.8
Sectoral distribution
Agriculture44485354555549454851504948
Industry19211614121111171716171716
Services37313132333440393533343334
Balance of payments
Exports2020953681016.619.718.516.916.0
Imports24199536812–20.1–26.2–24.2–24.4–25.1
Current account balance0.70.3–3.3–0.3–2.4–2.7–4.5–4.2–4.9–4.9–5.8–7.6
Overall balance5.2–1.6–5.31.1–2.1–1.9–1.8–1.23.02.42.41.4
Export volume index
(1980=100)222.6142.8100.0103.1116.584.085.7103.7114.9123.8139.0166.6176.6
Sources: Bank of Ghana, Quarterly Digest of Statistics, various issues; Ghana Statistical Service, Economy Survey, various issues; and World Bank (1992).
Sources: Bank of Ghana, Quarterly Digest of Statistics, various issues; Ghana Statistical Service, Economy Survey, various issues; and World Bank (1992).

The economy has always been dominated by agriculture. An attempt to change this structure contributed to the poor economic performance during the first decade after independence. The government sought to stimulate social and economic development through industrialization, by establishing a number of import-substituting industries. Consequently, manufacturing grew rapidly, increasing its share of GDP from 2 percent to 9 percent between 1957 and 1960. Manufacturing also became an important contributor to exports, with a 14 percent share in 1969.

The industrialization attempt was biased against agriculture, however. The share of agriculture in GDP dropped from nearly 60 percent to 46 percent between 1957 and 1969. There was no clear policy for developing agriculture to feed the newly established industries, most of which relied on imported raw materials. Hence the attempt to make the country self-reliant through import substitution also made it foreign exchange dependent. Because of its neglect, agriculture, primarily cocoa, remained a relatively low productivity sector in the sense that, although it was the largest employer of labor, it contributed proportionately less to GDP. Cocoa, for example, employed 17 percent of the labor force to produce only 8 percent of GDP. As the nation’s major foreign exchange earner and a major contributor to tax revenue, cocoa’s neglect without an appropriate substitute contributed immensely to the decline in the economy.

The industrialization effort and the speed with which it was pursued dictated the pace of debt accumulation. As Ghana’s first president Kwame Nkrumah said, “We need to do in ten years what has taken others a hundred years to do” (quoted in Killick, 1978).

In the haste to industrialize, heavy foreign borrowing became necessary, especially after 1961, because of a sharp shortfall in export earnings. Plants and equipment were financed largely by foreign supplier credits. These credits were of short maturity, and the heavy reliance on them caused debt problems to emerge early in the postindependence development effort. External debt rose sharply, from almost nothing at independence to nearly $600 million at the end of 1965; over 80 percent of this total consisted of suppliers’ credits that had come due for repayment. However, because of the neglect of cocoa on the one hand, and external factors on the other hand, export earnings did not improve, as the debt rose and repayments came due. Hence, Ghana was by the end of 1965 facing a debt repayment crisis, which was resolved through debt-rescheduling agreements in 1966, 1968, and 1970.

The structure of the economy continued to be dominated by agriculture, and the neglect of the sector precipitated the economic decline of the 1970–82 period. By 1982 the share of agriculture had returned to 55 percent (Table 1), yet the nation was not producing enough to feed itself. The increase in the share of the agricultural sector was mainly the statistical consequence of a decline in the industrial sector. Industry’s share of GDP fell from 15 percent to 12 percent. The contribution of the service sector also dropped, from 49 percent in 1960 to 33 percent in 1982, since the hard economic conditions and struggle for survival reduced demand for services.

The decline in industry was a reflection of its dependence on imported inputs, which was hampered by a severe foreign exchange constraint. The foreign exchange constraint had two main causes. On the one hand, domestic production of the main export commodity—cocoa—fell drastically. On the other hand, Ghana’s international credit rating was very low for the 1970–82 period, and the country was left far behind the rest of the developing world in the borrowing stampede of the 1970s. Capital inflows almost dried up. New commitments and disbursements of external funding remained modest throughout the period, as a result mainly of lack of action on macro-economic adjustment. Commitments averaged between $45 million and $55 million per year in the first half of the decade and increased to an average of about $100 million per year during the second half (Table 2). Actual disbursements fell below these levels. The only significant jump in new debt was in 1980, following the short-lived optimism on the return of the country to civilian government (in 1979) after seven years of military rule. Consequently, external indebtedness remained low in both relative and absolute terms throughout the 1970s. Yet debt repayment problems persisted because of the foreign exchange constraint. The yentua policy of the government in 1972 (yentua is a local word that translates as “we shall not pay”) reflected the desperation of the situation. This was followed by debt rescheduling in 1974.

Table 2.Ghana: External Debt and Its Growth, 1970–90
In Current DollarsIn Constant Dollars1
In millions of U.S. dollarsShare of total (In percent)In millions of U.S. dollarsShare of total (In percent)
19701,048.793,361.50
19711,154.1210.03,507.964.3
19721,167.011.13,287.35–6.2
19731,277.119.42,922.44–11.1
19741,290.821.12,112.63–27.7
19751,315.751.91,957.96–7.3
19761,340.681.91,971.590.7
19771,365.611.91,847.92–6.3
19781,390.541.81,712.48–7.3
19791,415.471.81,456.24–14.9
19801,440.401.81,212.71–16.1
19811,833.3427.31,587.3129.9
19821,907.004.01,739.969.6
19832,039.126.91,953.1812.3
19842,431.0019.22,388.0222.3
19852,736.0012.52,736.0014.5
19862,669.00–2.42,581.24–5.6
19873,126.6017.12,745.046.3
19883,133.220.22,635.17–4.0
19893,223.602.92,681.031.7
19903,521.809.22,692.500.4
Source: World Bank, World Debt Tables, various issues.

Calculated as the value of external debt deflated by the World Unit Import Value Index, 1985 = 100 (see Dornbusch and Helmers, 1988).

Source: World Bank, World Debt Tables, various issues.

Calculated as the value of external debt deflated by the World Unit Import Value Index, 1985 = 100 (see Dornbusch and Helmers, 1988).

The ERP was initiated in 1983 to reverse the decline in the economy, stabilize prices, and maintain a favorable balance of payments position. The program is roughly divided into two phases: the initial stabilization phase (1983–86) and the subsequent years of adjustment and growth. Since it began, the economy has shown signs of recovery: output growth has averaged about 5 percent per year since 1984 (Table 1), and the severe foreign exchange constraint seems to have eased. Even though agriculture still dominates the economy with a share in GDP of about 50 percent since 1983, the industrial sector has staged a remarkable recovery. The share of industry in GDP increased from 11 percent in 1983 to 17 percent by 1985, dropping only marginally thereafter to 16 percent in 1990. This growth is partly due to the rehabilitation of existing plant and equipment and the availability of imported raw materials made possible by an easing of the foreign exchange constraint.

The constraint has eased as a result of the substantial external capital inflows that have backed the program. At the beginning of the ERP (1984–86), commitments of external funding averaged about $344 million (1984–86; Table 3). In 1990 total commitments were more than twice that level, reaching $850 million. Gross disbursements have also increased substantially, averaging at least $250 million a year since the inception of the program. The sustained high levels of commitments and disbursements suggest that the aid effort on the part of donors could be strong, given serious commitment on the part of the recipient to pursue economic reforms. The higher inflows, however, resulted in a sharp increase in the pace of debt accumulation. The situation is particularly problematic as the structure of the economy, in terms of its ability to earn foreign exchange to meet debt servicing, has not changed.

Table 3.Ghana: Commitments and Disbursements of External Funding, 1974–90(In millions of U.S. dollars)
CommitmentsDisbursements
OfficialPrivateTotalOfficialPrivateTotal
19744545131831
19751661663131
1976116221384141
197770705353
1978921138428112
1979125125149149
1980194194182182
19814444103103
198248489494
198312712712350173
1984196332309819118
19854184746513942181
1986210128338256109366
19875884263034718365
19884860486390391
19897974083752544569
19908084285053538573
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.

Dimensions of the Debt

Data Sources and Problems

The measurement of external debt is fraught with both conceptual and practical problems (see, for example, Krueger, 1987; Ajayi, 1991). A major practical problem is inadequacy of data. This problem extends to inconsistencies in published debt figures. Time series data from official Ghanaian sources are not consistent. Publications of the World Bank and the IMF often have the same defect, as the figures on debt sometimes depend on which World Bank or IMF publication is used.

Nonetheless, external debt data used in this study are largely drawn from World Bank publications. This data source has obvious advantages. To a large extent, statistics obtained from this source are not available from official Ghanaian sources. Also, the World Bank figures enable an easy and meaningful international comparison. However, where necessary the data have been supplemented with information obtained from the Bank of Ghana.

The following standard definitions, distinctions, and categorizations have been followed. External debt is defined by type. Long-term debt is debt that has an original or extended maturity of more than 12 years. Short-term debt is debt that has an original maturity of one year or less. Debt with an original or extended maturity of between 1 and 12 years is classified as medium-term debt. With regard to long-term debt, a distinction is also made between public and publicly guaranteed debt on the one hand, and private nonguaranteed debt on the other. Public and publicly guaranteed debt consists of obligations of the national government and autonomous public bodies, as well as obligations of private debtors that are guaranteed by the government. Private nonguaranteed debt consists of obligations of private debtors that are not guaranteed by the government or any public entity.

Creditors are categorized as either official or private. Debt from official creditors comprises loans and credits from international organizations (multilateral donors) and loans from governments (bilateral donors) and their agencies.

Total Debt

The total debt is the sum of long-term debt (public and publicly guaranteed debt and private nonguaranteed debt), medium-term debt (including IMF credits), and short-term debt. Table 2 shows Ghana’s total external debt in both current and constant dollars since 1970. The growth rates of the debt are also shown. The trends in the total debt are depicted in Figure 1.

Figure 1.Ghana: Trends in Total Debt, 1970–90

(In billions of U.S. dollars)

Source: World Bank, World Debt Tables.

The stock of debt has increased sharply since the inception of the ERP, rising from $2 billion in 1983 to $3.5 billion (in current dollars) at the end of 1990. One reason behind the sharp increase is that Ghana’s reported debt in the pre-ERP period was underestimated. The reported debt excluded payment arrears, which totaled over $232 million in 1984 by the Bank of Ghana’s own estimates. However, the one significant factor that has influenced the level and growth of debt since the ERP is the government’s determined effort at macro-economic adjustment. As indicated elsewhere, the reforms have been supported with substantial loans and credits. The sharpest increase in the level of debt was experienced between 1983 and 1985, the stabilization and rehabilitation phase of the ERP. This is to be expected, as the shortages in the economy at the start of the program were such that Ghana needed massive injections of capital inflows if the reforms were to take root. More significant, there were sizable shortfalls in export earnings between 1983 and 1985 (Table 1), which made increased borrowing a necessity. The level of debt actually fell in 1986, as a result of improvements in export receipts that year.

Structure, Source, Composition, and Type of Debt

Since 1983 some major changes have occurred within the total debt, with significant implications for how the debt affects the economy. Among these are important changes in the maturity structure of the debt. Compared with the pre-ERP period, the structure from 1986 reveals a shift toward long-term debt (Table 4).

Table 4.Ghana: Structure of Total Debt, 1970–90(In millions of U.S. dollars except as noted)
Long-Term DebtMedium-Term DebtShort-Term Debt
Share of TotalShare of TotalShare of Total
Total DebtAmount(In percent)Amount(In percent)Amount(In percent)
19701,048.79524.0050314.6430209.7520
19711,154.12555.8248325.0928273.2123
19721,167.01587.2450335.5428244.2721
19731,277.11618.6648345.9927312.4624
19741,290.82650.0850356.4427284.3022
19751,315.75681.5051366.8927267.3620
19761,340.68696.4852377.3428266.8619
19771,365.61711.4652387.7928266.3619
19781,390.54726.4452398.2328265.8719
19791,415.47741.4252408.6529265.4018
19801,440.40756.4052342.1023341.9023
19811,833.34887.8448365.1020580.4031
19821,907.00861.0045352.9218693.0836
19832,039.12869.3342655.1932514.6025
19842,431.00823.2633908.3637699.3828
19852,736.00909.88331,087.8140738.3127
19862,669.001,224.26451,180.6044264.1410
19873,126.601,611.00511,257.8040257.808
19883,133.221,854.90591,166.6137111.713
19893,223.601,998.63621,116.1134108.863
19903,521.802,310.63651,164.5033106.673
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.

Under the ERP, medium-term debt became significant during the stabilization period, as its share in total debt increased and the share of long-term debt decreased. In the initial stages of the ERP, the share of long-term debt fell somewhat, from 45 percent in 1982 to 33 percent in 1985. At the same time, the share of medium-term debt increased steadily, from 18 percent to 40 percent, largely because of the increased use Ghana made of IMF credits during the stabilization phase of the program. This is a reflection of existing practice in international development cooperation that requires developing countries undertaking economic adjustment to initially seek IMF funding. Most major donors only maintain sizable long-term lending programs if a country has an IMF-supported adjustment program. The problem is that this situation saddles the adjusting country with rapidly maturing debt, as the case of Ghana clearly illustrates. Since 1986, however, the shift has been toward long-term debt, whose share in total debt increased from 51 percent in 1987 to 65 percent in 1990. A significant feature since 1986 is the drastic reduction in short-term debt. This is the result of the conversion of some short-term debt into long-term debt, following restructuring agreements between Ghana and some of its creditors. This structural change has reduced the incidence of bunching together of repayments that creates severe pressures on the balance of payments.

The classification shown in Table 5 indicates that Ghana’s long-term debt is overwhelmingly public and publicly guaranteed. Private nonguaranteed debt hovered around 1 percent of the total both before and during the ERP. This is a reflection of the dominant role of the public sector in the socioeconomic development of the country, and of the perceived low creditworthiness of private investment activity. This situation requires attention if the private sector is to play any meaningful role in the development process.

Table 5.Ghana: Total External Debt by Type, 1970–90(In millions of U.S. dollars except as noted)
Long-Term DebtMedium-Term Debt
Public and publicly guaranteedPrivate nonguaranteedIMF creditsOtherShort-Term Debt
ShareShareShareShareShare
Amount(In percent)Amount(In percent)Amount(In percent)Amount(In percent)Amount(In percent)
197051449.0100.9403.827526.220919.9
197154547.2100.8201.730526.427323.6
197257847.590.720.133228.424420.9
197361047.780.60034527.031224.4
197464449.960.520.135227.228422.0
197567050.9100.7453.432124.426720.3
197668651.1100.7604.537127.726719.9
197770151.3100.7634.632423.726619.4
197871651.5100.7614.433727.126519.1
197973251.790.6745.233423.626518.7
198074651.8100.7432.929920.734223.7
198187747.8100.5281.533718.458031.6
198284544.3160.8211.163433.269336.3
198384841.5211.028013.762830.851425.2
198479132.5321.346818.261925.563928.7
198586631.6401.565824.052219.075326.9
19861,18644.4381.474828.050919.02649.9
19871,58150.6300.974823.951716.52578.2
19881,80057.4541.768922.247715.21113.5
19891,94060.2581.768021.043613.51083.3
19902,25263.8581.662617.747813.51063.0
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.

Important changes have also occurred in the source composition of the debt (Table 6). The source of debt is either private or official, and Table 5 reveals a steady decline of private debt in the total portfolio, from about 15 percent during 1974–82 to about 7 percent in 1983–90. This reveals an important difference between Ghana’s debt structure and those of other severely indebted sub-Saharan African countries, such as Nigeria and Côte d’Ivoire, where debt from private sources has increased.

Table 6.Ghana: Source Composition of External Debt, 1970–90(In millions of U.S. dollars)
1970197119721973197419751976197719781979
Official8169019151,0231,0481,1031,1191,1191,1101,129
Bilateral667745749839834860761802773799
Multilateral149156166184214243358317337330
IMF46202003535474640
World Bank74747872117204226256278293
Private233253252254242212222246280286
Guaranteed223243243246236202212236270277
Nonguaranteed1010986101010109
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.
19801981198219831984198519861987198819891990
Official1,3251,7361,8001,8912,2832,5432,4042,8362,8802,9353,356
Bilateral9669549819941,0501,2971,1771,1471,1811,1481,244
Multilateral3597828198971,2331,2461,2271,6891,6991,7872,112
IMF438575280468656686767762737745
World Bank3443663564144826935807008761,0301,310
Private11597107142148193265290252188165
Guaranteed1058791121116153227260198130107
Nonguaranteed1010162132403830545858
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.

Official debt is divided into bilateral debt and multilateral debt. Both have increased steadily since 1983 (Table 6). The important feature of multilateral debt is the increased share of World Bank debt since 1986; by 1990 this debt made up over 60 percent of multilateral debt and nearly 40 percent of total official debt. The increased share of World Bank debt is largely responsible for improvements in the terms of debt, from an average maturity of 29 years with a 6.9-year grace period and a 4 percent annual rate of interest during 1970–82, to 31 years’ maturity, with an eight-year grace period and a 2.6 percent annual rate of interest since the ERP (Table 7). On the other hand, the increased share has implications for debt relief; this type of debt is never forgiven and is rarely rescheduled.

Table 7.Ghana: Average Terms of Debt, 1970–90
Terms
Total Debt (In millions of U.S. dollars)Interest rate (In percent a year)Maturity period (In years)Grace period (In years)Grant element (In percent)
19701,048.792.036.79.766.8
19711,154.123.832.07.066.2
19721,167.013.035.08.068.4
19731,277.113.035.08.068.4
19741,290.825.226.66.836.8
19751,315.755.226.66.836.8
19761,340.685.030.06.049.8
19771,365.615.030.06.049.8
19781,390.544.425.06.054.9
19791,415.474.425.06.054.9
19801,440.401.638.79.168.5
19811,833.343.724.55.644.7
19821,907.005.917.84.326.5
19832,039.122.236.57.763.7
19842,431.001.939.18.569.8
19852,736.004.230.27.246.9
19862,669.004.726.06.039.2
19873,126.601.929.27.858.3
19883,133.222.030.08.064.0
19893,223.602.029.08.064.0
19903,521.802.029.08.064.0
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.

The pattern of repayments (principal plus interest) has followed closely that of the total debt, rising sharply from the outset of the ERP (Table 8). The sharp increase in repayments from 1983 on is due in part to pre-ERP factors. As indicated earlier, Ghana had accumulated a substantial amount of arrears by the start of the ERR It was a requirement of the IMF that Ghana clear these arrears quickly in order to enhance its international creditworthiness. The arrears were scheduled to be cleared by the end of 1988. Moreover, debts that were rescheduled in 1974 had become due for repayment beginning in 1983, after the expiry of a 10-year grace period. Thus, the bulk of debt-service payments by the end of 1988 was due to accumulated arrears and rescheduled debt prior to the ERR The retirement of these debts is reflected in the fall in repayments in 1989 and 1990. However, from 1985 on, debt-service payments to the IMF became more significant, reflecting the increased use Ghana made of IMF funds beginning in 1983.

Table 8.Ghana: Repayments of External Debt, 1970–90(In millions of U.S. dollars)
PrincipalInterestTotal
19705.307.0012.30
19718.208.0016.20
19727.407.0014.40
197310.759.9020.65
197414.1013.0027.10
197524.2016.3040.50
197634.3018.8053.30
19778.3015.5033.80
197841.4023.9065.30
197939.5026.3065.80
198033.7026.3059.90
198140.3030.1070.40
198258.0041.5099.50
1983136.4067.10203.50
1984132.70101.00233.70
1985252.30102.80355.10
1986250.00105.30355.30
1987161.80121.50283.30
1988176.60126.60303.20
1989142.50111.90254.40
1990158.00100.00258.00
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.
Sources: World Bank, World Debt Tables, various issues; and External Debt Department, Bank of Ghana.

The Debt Burden and Its Causes

The Debt Burden

Debt repayment inevitably imposes constraints on a debtor country’s growth prospects since it involves the transfer of resources to other countries. Therefore, in order to adequately appreciate the problem of indebtedness, it is essential to relate the debt and its repayment to certain income resources generated by the debtor out of which repayments could be made.

A number of macroeconomic aggregates and debt ratios are often used to assess the debt burden of a country:

  • total debt service to exports of goods and services;

  • interest payments to exports of goods and services;

  • debt outstanding and disbursed to GNP;

  • total debt service to GNP;

  • interest payments to GNP;

  • total external debt to exports of goods and services; and

  • total external debt to GNP.

However, movements in the ratio of debt-service payments to exports of goods and services (the debt-service ratio) and in that of total external debt to income (the debt-GNP ratio) are the two most important indexes used to assess the debt burden; the higher these ratios, the greater the burden. These indexes for Ghana are shown in Table 9.

Table 9.Ghana: External Debt Outstanding and Selected Debt Burden Indicators, 1970, 1975, and 1980–90
1970197519801981198219831984198519861987198819891990
Debt outstanding
(In millions of U.S. dollars)1,048.81,315.81,440.41,833.31,907.02,039.12,431.02,736.02,669.03,126.63,133.23,223.63,521.3
As share of GDP
(In percent)29.2383337384446525370626860
As share of exports of goods
(In percent)122831241882143932434336438232339337
Debt-service ratio
(In percent)5.05.47.48.06.63944624962675839
Source: World Bank, World Debt Tables, various issues.
Source: World Bank, World Debt Tables, various issues.

These trends have also been measured against a background of levels considered normal (see World Bank, 1989–90, Vol. 1) in Figures 2 through 4. A clear picture emerges from the table and figures: the debt problem has been critical since 1983, and Ghana is justifiably classified as a severely indebted low-income country. The debt-service ratio rose sharply, from 39 percent in 1983 to a peak of 67 percent in 1988, before falling back to about 39 percent in 1990.

Figure 2.Ghana: Debt-Service Ratio, 1970–90

(In percent)

Source: World Bank, World Debt Tables.

Figure 3.Ghana: Debt-Export Ratio, 1970–90

(In percent)

Source: World Bank, World Debt Tables.

Figure 4.Ghana: Debt-GNP Ratio, 1970–90

(In percent)

Source: World Bank, World Debt Tables.

It must be pointed out again that the sharp rise in the debt-service ratio from 1983 on was due largely to repayments of accumulated arrears and rescheduled debt prior to the ERP. Nonetheless, since 1983 the debt-service ratio has been above 30 percent—a reflection of a state of severe indebtedness. Likewise, the levels of both the debt-export ratio and the debt-GNP ratio (Figures 3 and 4) have remained above normal since 1983, also reflecting the critical nature of Ghana’s debt. Although the outlook on the debt-service ratio should be for a moderation following the conclusion of repayments on accumulated arrears, the same cannot be said for the debt-export ratio and the debt-GNP ratio. It is obvious that Ghana’s ability to generate faster growth in exports and income is crucial for any moderation in these ratios. It is common to use the debt-service ratio and the debt-GNP ratio as indexes of liquidity and solvency, respectively.1 A liquidity problem refers to the inability of a country to service its debts now in the amount initially contracted. Lack of liquidity occurs when a country does not have enough cash on hand to pay current obligations (Ajayi, 1991). The solvency issue relates to whether the value of a country’s liabilities exceeds the ability to pay at any time; a country is insolvent when it is incapable of servicing its debt in the long run (Ajayi, 1991). With reference to the debt-service ratio and the debt-GNP ratio, it is apparent that Ghana has faced liquidity difficulties since 1983 and that its ability to remain solvent has also been impaired.

It is obvious that Ghana’s creditworthiness over the past decade has been kept intact only by massive inflows of external grants, loans, and credits. The concern, however, is how long can Ghana expect to depend on such inflows.

Causes of the Debt Problem

The literature abounds with commentary on the causes of debt crises in developing countries. The underlying issue, emphasized by Dornbusch and Fischer (1985) as well as by Greene and Khan (1990), relates to the fundamental aim of borrowing: that the addition to the stock of external debt over time must contribute to growth and development and, in particular, to the country’s ability to make payments to creditors. The argument is that a debtor country will face repayment difficulties if it is unable to generate a sufficient increase in output and export earnings. Many factors—domestic and external—are responsible for this outcome. The domestic factors often cited include wrong macroeconomic policies, such as fiscal irresponsibility and exchange rate misalignment (Khan and Knight, 1983). Other domestic factors include policies that deter saving, such as negative real interest rates, which in turn reduce investment and encourage capital flight. Also, when long-run projects are financed with short-term credits, debt problems occur (Tanzi and Blejer, 1984). External factors, including oil shocks, deteriorations in the terms of trade (Greene and Khan, 1990), and rising foreign interest rates (Krumm, 1985), also contribute to debt problems.

Ghana’s severe debt situation is the combined effect of a number of factors. The crucial factor is the country’s inability to generate sufficient foreign exchange through export earnings. Consequently, the country’s current account deficit, which has continued to widen (Table 1), has been hard to sustain for balance of payments stability. The country is unable to generate sufficient foreign exchange through exports because of its long-standing dependence on a few export commodities (cocoa and gold), the international prices of which have been subject to wide fluctuation. The effect of these since the inception of the ERP is quite clear. Since 1983, Ghana’s export volumes have more than doubled (see Table 1). Export values, however, have increased by a much smaller proportion. The less-than-proportionate increase in export values is due to the decline in the real prices of cocoa and gold. The real prices of both commodities decreased during the 1980s, with sharper and continuous declines since 1984. For example, taking 1980 as a base year, the index of the real cocoa price declined continuously from 113.2 in 1984 to 35 in 1990, and that for gold from 63.2 in 1984 to 48.2 in 1990. Indeed, there is a clear case for Ghana to reduce its long-standing dependence on so few primary commodities by widening and sustaining the base of its nontraditional exports.

Another factor behind Ghana’s debt difficulties is the low rate of return on investment to which borrowed funds are applied. When capital inflows finance productive investments with rates of domestic and external return that are higher than the cost of borrowing, debt service should normally be met from the increased future stream of foreign exchange earnings and still leave a considerable net benefit for the recipient economy. In Ghana’s case, much of the capital inflows went into infrastructural investments that have long gestation periods and/or large indivisibilities, so that returns are low, especially in their early years. Indeed, it is estimated that the average rate of return on investment in the major projects and programs to which foreign loans were applied is in the range of 0.8 percent to 1.1 percent (Dordunoo, 1990), whereas the average rate of interest on debt during 1983–90 ranged between 1.9 and 4.7 percent (Table 7). As long as the rate of interest on a loan is above the rate of return on a given volume of investment from such a loan, there are bound to be debt difficulties. It certainly behooves Ghana to redirect borrowed funds into more productive investments to generate adequate returns.

Low saving is another factor contributing to Ghana’s debt difficulty. Ghana has one of the lowest domestic saving rates in sub-Saharan Africa. In spite of major successes of the ERP, such as the lowering of inflation (Table 1) and reforms carried out in the financial sector, the domestic saving effort remains low. A major external factor that has contributed to the poor saving effort is the sharp deterioration in the country’s terms of trade. Figure 5 indicates clearly the sharp deterioration in the terms of trade since 1984. This deterioration affects domestic saving through the so-called Harberger-Laursen-Metzler effect, which argues simply that a terms-of-trade deterioration decreases real income, and the decrease in real income reduces saving out of any given income.

Figure 5.Ghana: Terms of Trade, 1970–90

(1975=100)

Source: International Monetary Fund, International Financial Statistics.

The ratio of gross domestic saving to GDP, which averaged 6 percent between 1983 and 1990, was about one-third the 1970 level.2 Consequently, the rate of domestic investment is also low. The average rate of domestic investment to GDP, at 9 percent between 1983 and 1990, was not even enough to replace depreciated capital, as the required minimum was estimated at about 13 percent. The investment-debt ratio (Figure 6) also shows the critical nature of the low investment effort.

Figure 6.Ghana: Investment-Debt Ratio, 1970–90

(In percent)

Sources: World Bank, World Debt Tables; and International Monetary Fund, International Financial Statistics.

It is essential that Ghana intensify its efforts to increase domestic saving. Major obstacles to the efficient functioning of the financial system, including lack of competition, lack of confidence of the saving public in the financial system, and discriminatory rules against privately owned financial institutions (see also Osei, 1992b), have to be addressed in an effort to expand the scope of business of the financial system to increase saving.

A Paradox: Deteriorating Debt Profile, Low Saving and Investment, but Strong Economic Growth

It is paradoxical that in the face of a deteriorating debt profile and low saving and investment, Ghana has maintained strong economic growth since 1984. This derives from the state of the Ghanaian economy prior to the ERP and to reforms carried out under the ERR However, a most significant factor behind the strong economic growth is the fortuitous return to normalcy in the weather. Adequate rains since 1984 have played a major part in restoring agricultural production. Output of food crops has risen, turning the severe food shortages of the pre-ERP era into surpluses. Production of cocoa has also recovered.

In addition, since 1983 there have been important changes in the foreign aid climate. Besides the sharp increases in inflows of foreign capital, the credit pipeline has been restructured, shifting available funds from slow-disbursing project aid to faster-moving program support. This has increased the pace of disbursement. In effect, even though the debt stock has also increased sharply, foreign credit has been available on time to enable Ghana to restore some momentum to its import program, which is so crucial to economic growth. Also, the timely availability of credits has quickly revived existing plant and machinery in the industrial sector, which now contributes appreciably to income growth.

Moreover, since the inception of the ERP there has been what may be termed “reversed public sector fungibility.”3 While acquiring debt, Ghana has overhauled its tax machinery, and the budgetary focus has been geared toward the elimination of subsidies. The result, as discussed in Osei (1992a), is that external credit over the ERP period supplements (rather than replaces, as was the case during 1970–82) productive state expenditure, contributing to the strong economic growth.

Certainly, the massive inflows of foreign capital since 1983 have propped up the economy and enabled some changes to be made. The problem remains the Ghanaian economy’s low ability to repay the mounting debt. As we have already seen, the economy is still structurally weak in its dependence on a few primary commodities for foreign exchange earnings. In fact, the calculations in Table 10 indicate that the rate of growth of debt has exceeded the rate of growth of exports for the greater part of the 1983–90 period.4 As long as the rate of growth of debt exceeds the rate of growth of exports, difficulties in repayments are bound to occur.

Table 10.Ghana: Unsustainable Borrowing, 1971–90
Growth Rate of Debt (In percent)Growth Rate of Exports (In percent)Unsustainable Borrowing1
197110.0–18.2–28.2
19721.113.712.6
19739.447.638.2
19741.114.213.1
19751.919.918.0
19761.9–0.1–2.0
19771.914.112.2
19781.8–2.2–4.0
19791.816.714.9
19801.84.22.4
198127.3–31.4–58.7
19824.0–14.248.2
19836.9–37.3–44.2
198419.236.617.0
198512.510.5–2.0
1986–2.421.023.8
198717.110.7–6.4
19880.25.85.6
19892.9–7.3–10.2
19909.210.61.4
Source: World Bank, World Debt Tables, various years.

Unsustainable borrowing is defined as the excess of the percentage rate of growth of debt over the percentage rate of growth of exports.

Source: World Bank, World Debt Tables, various years.

Unsustainable borrowing is defined as the excess of the percentage rate of growth of debt over the percentage rate of growth of exports.

Debt Sustainability and Fiscal Stability

There is no gainsaying that sustained economic growth is possible only within a sound macroeconomic framework. In such a framework, fiscal policy plays a key role; sound fiscal policy is crucial to macro-economic stability. Essentially, there is a link between external debt sustainability and fiscal stability, especially in a situation like Ghana’s, where external debt is largely public sector debt (see, for example, Fischer and Easterly, 1990; van Wijnbergen, 1989).

The theoretical underpinning of the link between external debt and fiscal behavior is quite straightforward. Basically, there are four ways of financing a public sector deficit: printing money, running down foreign exchange reserves, borrowing abroad, and borrowing domestically. Each of these forms of finance can result in major macroeconomic imbalance: printing of money may lead to inflation; use of foreign reserves may be associated with the onset of exchange crises; foreign borrowing may lead to external debt crises; and domestic borrowing may be associated with higher real interest rates. Of course, there are links between and among these problems. For example, high transfers as a result of a debt crisis could cause government domestic borrowing to increase. This increase will reduce credit that otherwise would be available to the private sector, thereby putting pressure on domestic interest rates. Even where interest rates are controlled, high domestic borrowing may lead to credit rationing and crowding out of private sector investment.

The arithmetic of the relationship between external debt and fiscal behavior is as follows. The increase in the sum of domestic and external debt is equal to the government budget deficit, net of money creation. If only the government borrowed abroad, then the decrease in the government’s external debt would be equal to the current account balance. Therefore, the current account balance is the sum of the increase in domestic government debt, the budget surplus, and money creation.

Decomposition of the 1983–90 data (Table 11) shows that the noninterest government surplus amounted to 41 percent of the current account balance, the seigniorage tax (defined as the variation in central bank liabilities in real terms) amounted to 28 percent, and the increase in domestic debt to 31 percent. However, if foreign grants are removed from government revenue, the decomposition shows that the share of the government surplus drops to 21 percent, that of the seigniorage tax increases to 41 percent, and that of the domestic debt increases to 38 percent.

Table 11.Ghana: Current Account Counterparts, 1983–90(In millions of cedis)
19831984198519861987198819891990
Noninterest current account-3,159-6841,85012,79230,46342,64765,87069,154
Seigniorage28,69724,38426,58093,408-24,980192,957123,03473,170
Government surplus (with grants)-4,934-4,844-7,5802994,0598,9119,89412,874
Domestic debt29,31932,90837,76650,68647,90854,32548,78564,684
Bank of Ghana16,77819,88121,63423,95423,95421,84113,68613,691
Commercial banks4,7804,5355,2106,2006,2007,1875,00016,483
Secondary banks1,2411,4813,4826,0746,074
SSNIT1,9512,3882,8987,3267,32614,75411,93618,046
Private sector (including institutions)4,5694,6234,5414,3544,35410,54318,16316,463
Sources: Ghana Statistical Service, Economic Survey, 1988; and Institute of Statistical, Social, and Economic Research (1993, Appendix Table B.7).
Sources: Ghana Statistical Service, Economic Survey, 1988; and Institute of Statistical, Social, and Economic Research (1993, Appendix Table B.7).

These results are quite interesting. They point first to the high dependence of government revenues on foreign grants, and they highlight the need for increasing revenue generation by the government to achieve self-sustaining growth. As indicated elsewhere, fiscal reforms put in place under the ERP have to some extent overhauled the tax machinery and eliminated some subsidies. These, in addition to the effects of exchange rate reforms, have increased government revenue. However, there is still a need for further measures and reforms to increase government revenue, especially since the government’s overall budget deficit remains quite substantial.5

The decomposition also reveals the importance of the seigniorage tax in total government revenue. The literature is clear on the dangers of a high dependence on seigniorage. It is well known that rates of seigniorage of much more than 2.5 percent of GNP are not sustainable in developing countries (Fischer, 1982; Fischer and Easterly, 1990), and that even that rate would be tenable only in a very rapidly growing economy. Ghana has maintained rates of seigniorage to GNP more than three times that level since 1983, indicating the instability of the situation. The high dependence on this tax is a contributing factor to the government’s inability to bring inflation down below the two-digit level or to target rates.

It is also apparent from the decomposition that the domestic debt accounted for a large share of the current account balance. Domestic borrowing is usually an act of expediency by a government that would prefer to finance the budget through taxation but finds it inconvenient to do so. Its use is more often advised as a temporary measure to meet emergencies that otherwise would require sharp increases in taxation. Contrary to the Ghanaian government’s declared intention of reducing its domestic borrowing, the domestic debt has increased (see Table 11).6 The implications of the increase in the domestic debt for interest rates and private investment are clear. The domestic debt increase is a major factor behind the substantial pressures on domestic interest rates, especially bank lending rates, which increased from 19 percent in 1983 to 33 percent in 1990. The high cost of borrowing is a major constraint on private investment. The rise in domestic interest rates may be thought of as a version of the transfer problem involved in foreign debt service, as the government is forced to repay its own domestic debt at higher interest rates.

These results indicate that there is a continuing fiscal problem in Ghana. The results require that Ghana take steps to ensure fiscal stability as the country attempts to meet its external debt repayments. The literature cites many fiscal adjustment prescriptions that Ghana might take. These include the introduction of new taxes such as the value-added tax to increase government revenue; the elimination of waste in government expenditure; the intensification of diversification and privatization of state enterprises (see, e.g., Tsikata and Amuzu, 1992). Also, as pointed out by Fischer and Easterly (1990), sustainable fiscal policy depends on how fast an economy is growing.7 The lesson here is that accelerated growth must be a target for Ghana to maintain fiscal stability and external debt servicing.

Debt and Economic Growth

The need for Ghana to pursue accelerated growth in order to reduce its debt problems and, more important, to break out of its low-income status makes it worthwhile to investigate how far external indebtedness would affect future growth. This section analyzes the effect of debt on medium-term growth.

Debt problems have been incorporated into models, commonly referred to as “growth-cum-debt” models, to address issues relating to debt sustainability. The focus is on how and how far debt affects the growth prospects of debtor countries. The literature on growth-cum-debt models has gone through two main phases. In the first phase, authors such as Avramovic and others (1964), King (1968), and Solomon (1977) were concerned with making judgments on the debt capacity of developing countries in the context of the Harrod-Domar growth model. The focus in the literature was on describing how debt situations evolve over time. Other authors, including Dhonte (1979), Loser (1977), and Feder and Just (1977), examined the circumstances under which countries experience debt-servicing difficulties. The attention here was on the external performance of the debtor’s economy in relation to debt-service claims. Another set of authors focused on the supply side of the international financial market. Their studies, including those by Feder and Ross (1982) and Sachs and Cohen (1982), examined factors that influence lending behavior. The second phase, which represents more recent literature, includes studies by Cohen (1985, 1988), Solis and Zedillo (1985), and van Wijnbergen (1989). These studies provide a way to relate foreign indebtedness to long-run growth.

Debt and Economic Growth in Ghana

The issue of how far debt would affect growth in Ghana can be analyzed following some of the approaches developed in the second-phase literature. The model followed, as presented by Ajayi (1991), uses a level of output (Y) given by

where σ is the reciprocal of the incremental capital-output ratio, and k is the capital stock.

Let

and

where I is investment and δ is the depreciation rate of capital. Equation (1) becomes

Given the identities

where X is exports, M is imports, S is saving, r is the rate of interest, D is debt, and

consequently,

Let the saving function be

Using Equation (4), investment can be expressed as

Equations (4) and (9) are solved for a number of possible paths of D and r. The rule used for Dt is the dynamic equation

where γ is a constant that is varied in each scenario. Equation (10) implies that

and since

we have

which implies that

Thus, various scenarios of r and γ would allow an assessment not only of economic growth prospects, but also of the different paths of the trade balance (MtXt), as well as indications of the debt burden such as Dt/GDP.

Empirical Results

The value of γ is varied in the scenario from 0.00 to 0.10. The incremental capital-output ratio is calculated following its conventional definition as the ratio of capital formation in the current period to the increase in GDP over the previous period. Allowing for three possible values of the rate of interest (r = 0.01, 0.03, and 0.06), simulations were run for the period 1991–2000. The income growth prospects and the different paths of the trade balance and the debt burden under the various scenarios are summarized in Table 12.

Table 12.Ghana: Results of the Growth-cum-Debt Model
Growth Prospects
r = 0.01 σ = 0.25r = 0.03 σ = 0.25r = 0.06 σ = 0.25
γDtMtXtgDtGDPMtXtGDPgDtGDPMtXtGDPgDtGDPMtXtGDP
0.003,5223510.04650.6060.0590.04220.6080.0590.03990.6100.059
0.013,5573590.05570.6000.0580.04560.5990.0610.04020.6100.068
0.023,6284120.05570.5850.0640.04680.5740.0650.04020.5910.068
0.033,7365510.05500.5650.0780.04920.5550.0780.04110.5820.065
0.043,8855590.05420.5510.0750.05010.5510.0790.04560.5660.062
0.054,0795850.05540.5430.0750.05420.5420.0780.04860.5580.079
0.064,3235850.04630.5460.0750.04120.5440.0780.04010.5990.078
0.074,6265880.04630.5500.0710.04120.5510.0720.04010.5540.075
0.084,9965900.04450.5560.0690.04120.5560.0690.04010.5710.072
0.075,4466050.04480.5710.0670.04000.5700.0690.03880.5810.071
0.105,9916050.04370.5910.0680.04000.5890.0690.03880.6700.071
Source: Author’s calculations.
Source: Author’s calculations.

In terms of the model, varying the rate of interest has very little impact on income growth, the trade balance, and the debt burden; little is lost in these indicators if the rate of interest is doubled from 3 percent to 6 percent.

The estimates indicate that, given the various scenarios, Ghana’s trade balance would widen. As a share of GDP, the trade deficit would grow from about 5.9 percent to a peak of about 7.7 percent, before falling marginally to about 7.1 percent. Consequently, the debt burden would remain high. The debt-GDP ratio would stay above the critical 50 percent. These results reemphasize the necessity for Ghana to pursue export expansion for self-sustaining growth. The growth estimates indicate that Ghana would maintain a 4 to 5 percent growth rate for the next decade. This may be considered satisfactory, especially if viewed against the average for sub-Saharan Africa for the last 10 years of below 2 percent, which most analysts believe may not improve in the next decade. However, there may be little cause for optimism if the 4 to 5 percent growth rate is considered in relation to the accelerated growth Ghana needs to break out of its poverty trap. The World Bank (1992) estimates that at current rates of economic growth (5 percent a year) and population increase (about 3 percent a year), the average poor Ghanaian would not cross the poverty line for another half century. By contrast, if the pace of economic growth could be raised to 8 percent a year, this crossover time would be reduced to about 23 years.

Our earlier question of whether Ghana can achieve accelerated growth suggests that there may be preconditions for fast growth that do not yet exist in Ghana. The results here indicate that external debt is one factor that constrains rapid growth.

Conclusion

The basic conclusion reached in this chapter is that external debt represents a major constraint on Ghana’s economic performance. The current debt situation requires that Ghana take steps to increase its ability to service foreign debt by vigorously pursuing export expansion. This draws attention to the long-standing dependence of the economy on a few traditional export commodities. Ghana should encourage more nondebt foreign exchange earnings, such as tourism, as well as take steps to widen and sustain the base of its nontraditional exports. Steps must also be taken to attract more foreign direct investment, which will bring in not only the external finance but also the skills and technology so essential for the rapid expansion of the economy. In addition, Ghana should pursue further internal reforms to increase domestic saving and fiscal reforms that would increase the government’s revenue, so as to minimize dependence on types of financing that are detrimental to the economy’s health.

Ghana can make a case for debt relief as it carries out its internal reforms. Creditors could grant debt reduction on a wider scale in order to reduce the debt stock and reduce repayments. Other remedial measures such as debt rescheduling should recognize the dependence of the Ghanaian economy on cocoa and incorporate built-in flexibility to correspond with international cocoa prices.

References

Liquidity and solvency may also be determined in a number of other ways. A simple rule for solvency is that the export growth rate be greater than the interest rate on the debt (Eaton and Taylor, 1986; Cohen, 1985). The difference between net debt (total indebtedness minus foreign reserves) and export earnings may also be used as an indicator of liquidity problems (Ajayi, 1991).

Underlying the poor saving effort is low per capita income, which is still below pre-ERP levels. Also, the financial system still lacks depth. This is reflected in a low M2–GDP ratio, which in 1990 was 14 percent. This does not compare well with other sub-Saharan African countries like Kenya, Zambia, and Côte d’Ivoire, where rates of 30 percent are common.

“Public sector fungibility” may refer to a situation where there is replacement of productive state expenditure by external credit. This occurs when a country, in receiving credit, switches local resources into unproductive expenditure and/or into reductions in taxation.

The literature sometimes considers the excess of the percentage rate of growth of debt over the percentage rate of growth of exports of goods and services as the rate of unsustainable borrowing (see, e.g., Ajayi, 1991). In this sense, Ghana could be regarded as having undertaken unsustainable borrowing during alternate years, in 1983, 1985, 1987, and 1989. The growth rate of debt in these years was greater than the growth rate of exports (Table 10).

The overall budget deficit, which stood at about 2.4 percent of GDP at the start of the ERP, fell considerably, to about 0.8 percent of GDP, in 1988–89. However, by 1990 it had risen again to 1.3 percent of GDP (see World Bank, 1991b, Table 1.6). The worsening fiscal performance, even as government expenditure continued to shrink, is due to a deterioration in revenue performance.

It is noticeable from Table 11 that there has been a major shift away from the central bank as the principal source of deficit financing. Indeed, the nonbank private sector increased its share of domestic debt from 15.6 percent in 1983 to 25.5 percent in 1990. This is a positive development in the government’s efforts at reducing inflationary pressures in the economy, notwithstanding the adverse consequences of the increase in the domestic debt.

This point is seen clearly from the following identity, which shows the determinants of the change in government debt: change in d = (primary deficit/GNP) - (seigniorage/GNP) + (real interest rate - growth rate) x d, where d is the ratio of government debt to GNP. A higher growth rate reduces the last term in the equation.

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