June 29, 2009
This debt sustainability analysis (DSA) updates that prepared for the 2008 Article IV consultation, discussions for which were completed in June 2008.1 The starting point for the DSA is less favorable than a year ago, reflecting the rise in the debt-to-GDP ratio between end-2007 and end-2008 on account of the large fiscal deficit in 2008. At the same time, notwithstanding the large fiscal deficit in 2008, the new government’s goals for fiscal consolidation are more ambitious than those discussed a year ago. Further, there is now greater assurance that oil production will start in 2011, and this assumption is now included in the macroeconomic baseline. The combination of a more ambitious fiscal consolidation sustained over the medium to long term, together with stronger real GDP growth and higher export levels post-oil production all contribute to a more favorable DSA baseline than in 2008. Public sector net debt is projected to fall to less than 40 percent of GDP by the end of the projection period from 60-70 percent of GDP in 2008–2012. By contrast, DSA baseline projections in 2008 showed public debt rising to exceed 80 percent of GDP over a 20-year period. Notwithstanding this improvement, stress test analysis suggests that Ghana remains at moderate risk of debt distress, in line with the 2008 DSA.
Key risks to Ghana’s debt sustainability relate to the medium- to long-term fiscal outlook, as well as the prospects for growth in a post-oil economy. The baseline depends on determined fiscal adjustment in the near term, combined with rigorous efforts to limit borrowing needs over the medium- to long-term. Failure to reduce the primary deficit from 2009 levels would be associated with a near doubling of the public debt-to-GDP ratio over two decades. Similarly, the baseline assumes sustained, strong growth in the non-oil, non-mineral economy and a diversified and competitive export base. This will require macroeconomic stability, continued improvements in the business climate, and prudent management of Ghana’s oil revenues.
The DSA was prepared by IMF and World Bank staffs in collaboration with the Ghanaian authorities.
The 8.5 percent of GDP reduction in the fiscal deficit during 2008–2010 is projected to occur through a 1.1 percent of GDP increase in revenues, 3.8 percent of GDP decline in expenditures, 0.1 percent of GDP reduction in arrears, and an additional 3.5 percent of GDP in fiscal measures.
These projects are expected to address the key bottlenecks in developing the industrial and manufacturing capacity of Ghana, including transportation infrastructure, telecommunication, power and energy, as well enhancing the productivity of agriculture. Project selections would be guided by adequate cost-benefit analysis yielding high rates of return.
The DSA assumes that oil savings are invested abroad and earn a yield in line with the U.S. dollar Libor interest rate.
See Figure 4 of the 2008 DSA.
The World Bank’s Country Policy and Institutional Assessment (CPIA) rates Ghana as a strong performer. Under the joint IMF-World Bank debt sustainability framework, the corresponding indicative debt burden thresholds are 50 percent for the NPV of debt-to-GDP ratio, 200 percent for the NPV of debt-to-exports ratio, and 25 percent for the debt-service-to-exports ratio. See Operational Framework for Debt Sustainability Framework in Low-Income Countries–Further Consideration, available at www.imf.org and www.worldbank.org.
The PRGF provides for a maximum of US$300 million of new non-concessional borrowing through mid-2010 to finance oil and gas projects. This explains the difference in external debt-to-GDP figures with the staff report.
Real GDP is projected to rise by 24 percent in 2011, while exports are projected to rise by 51 percent in dollar terms.
The higher level compared to the IMF staff report figures reflect the additional nonconcessional borrowing included in the DSA analysis (para. 10).