Ghana: Staff Report for the 2014 Article IV Consultation–Debt Sustainability Analysis
Author:
International Monetary Fund. African Dept.
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Publication Date:
30 May 2014
eISBN:
9781616355609
Language:
English
Keywords:
ISCR; CR; deficit; real GDP; GDP deflator; authority; service-to-revenue ratio; financing condition; sustainability analysis; creating flow; stock indicator; Public and publicly-guaranteed external debt; Fiscal stance; Depreciation; government financing operation
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This 2014 Article IV Consultation highlights the emergence of large fiscal and external imbalances since 2012, which has created significant challenges for Ghana. A swift return to macroeconomic stability in 2013 was thwarted by weaker external and domestic conditions. Reflecting lower gold and cocoa exports, the current account deficit exceeded 12 percent of GDP. Although recently revised estimates point to an only moderate slowdown in growth to about 7 percent, the fiscal deficit target of 9 percent of GDP was missed by about 1 percentage point. Ghana’ short-term economic outlook is subject to significant risks, and growth is projected to slow to 4¾ percent in 2014.

Abstract

This 2014 Article IV Consultation highlights the emergence of large fiscal and external imbalances since 2012, which has created significant challenges for Ghana. A swift return to macroeconomic stability in 2013 was thwarted by weaker external and domestic conditions. Reflecting lower gold and cocoa exports, the current account deficit exceeded 12 percent of GDP. Although recently revised estimates point to an only moderate slowdown in growth to about 7 percent, the fiscal deficit target of 9 percent of GDP was missed by about 1 percentage point. Ghana’ short-term economic outlook is subject to significant risks, and growth is projected to slow to 4¾ percent in 2014.

Key Assumptions Under the Baseline Scenario

1. Macroeconomic assumptions are broadly in line with those in the 2013 DSA, with deviations mainly related to the projection of oil production and higher cost of borrowing (Box 1, Tables 1–2). Revisions reflect: (i) updated information on the timing of oil production; (ii) an associated upward revision in real growth for the medium term and lower growth subsequently; and (iii) higher cost of borrowing, consistent with current lending conditions and projected rising world interest rates in the medium term. As projections on future oil discoveries and gas production are not available (and thus, not captured), the growth projections are conservative.

Table 1.

Key Macroeconomic Assumptions

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2. The projected debt dynamics are, however, contingent on successful fiscal consolidation. The baseline assumes fiscal consolidation that is consistent with the authorities' 2014 nominal budget targets and stated policies, but a more conservative growth outlook and higher interest payments. This implies a gradual reduction in the fiscal deficit to 7½ percent of GDP in 2016, with subsequent changes driven primarily by the profile for oil revenue.

External and Public Debt Sustainability

A. External Debt Sustainability Analysis

Baseline scenario

3. Ghana's external debt indicators are broadly in line with the 2013 DSA, with PV indicators moderated by a change in the discount rate (Table 3 and Figure A1). The deterioration in the PV of debt stock indicators compared to last year’s assessment was mitigated by an increase in the discount rate from 3 to 5 percent.2 Export related indicators improve related to the update in the oil production profile. Most importantly, the debt service-to-revenue indicator deteriorates compared to the last assessment due to expected rising costs of external commercial borrowing (1 percentage point above the assumptions in the last DSA), the issuance of the 2013 Eurobond, and the weakening of the cedi.

Baseline Macroeconomic Assumptions

Real GDP-growth: While still solid, real growth has declined to a projected 5½ percent in 2013, due to disruptions in power supply from the West African Gas Pipeline in the first half of the year, crowding out from high real interest rates, higher import costs due to the depreciation, and falling gold production related to the drop in world prices. In 2014-15, growth is projected to remain at this more moderate level until production from new oil fields boosts output in 2016. In the long run, real growth is assumed to stabilize at 4¾ percent, with new oil discoveries and the associated gas production implying significant upside potential.

Inflation: Inflation overshot the end of the year target range of 9+/-2 percent (end-year CPI inflation was 13.5 percent, partly due to large increases in utility prices), and is projected to remain at this elevated level in 2014. Supported by an improvement in the policy mix, inflation is expected to decline in the medium run, with the GDP deflator stabilizing at 6¾ percent in 2020–2033.

Government balances: The overall fiscal balance fell only slightly to an estimated 10.9 percent of GDP in 2013, with interest expenditures amounting to some 5 percent of GDP. Based on the government's policy pronouncements and updated macro-projections, including lower growth and higher interest rates than assumed in the budget, the deficit is expected to stay above 10 percent of GDP in 2014 (primary deficit of 3½ percent). Increased revenues from the production of oil and further consolidation in 2015 and 2016 would balance primary expenditures and revenues in the medium to long term.

Current account balance: On the back of a higher fiscal deficit, declining gold and cocoa prices and large oil imports due to electricity disruptions in the first half of the year, the 2013 current account deficit rose above 13 percent of GDP. Owing to weak terms of trade, the deficit is expected to remain above 10 percent of GDP in 2014 and elevated until 2015. With increased oil production, the deficit is projected to decline to about 7 percent of GDP by 2017 and to fall gradually to about 4 percent of GDP in the long run, broadly in line with its optimal level according to staff's external balance assessment. Reserves would build up to about 4 months of imports in the long run, consistent with the government's own medium-term target.

Financing flows: While still significant, FDI is estimated to have declined to about 7¼ percent of GDP in 2013. Driven by the discovery of new fields, FDI is projected to stay close to 7½ percent of GDP until 2018, and then to gradually decline to 4 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 ½ percent of GDP in the medium to long term. Borrowing is projected to become increasingly nonconcessional, with rates for external commercial borrowing revised upwards by 1 percentage point compared to the last DSA.

Table 2.

Official Borrowing Assumptions

(in Millions of U.S. Dollars)

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Table 3.

Indicators of External Debt Vulnerabilities (Baseline)

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4. The external debt service-to-revenue ratio breaches its indicative threshold temporarily in the long term, but a probability approach confirms that the breach is not significant (Figure A2). Without assuming measures to smooth the amortization of the 2013 Eurobond, the 2023 bullet repayment results in a breach in the indicative external debt service-to-revenue ratio. Issuance of another Eurobond in 2014 would lead to a breach in two consecutive years in the absence of measures to smooth the amortization profile, and to a possibly more sustained breach of the same threshold towards the end of the projection period. A complementary probability approach, which assesses Ghana's external debt sustainability based on an indicative threshold derived from Ghana's own institutional and growth characteristics, suggests that this breach is minor and temporary (1 year). Thus, the breach, which could be smoothed out in the course of the next 10 years, does not warrant a change in Ghana's assessed risk of debt distress, but is nonetheless indicative of the longer-term perils of continued resorting to market financing to finance recurrent fiscal deficits.

Standard stress tests

5. Standard stress tests confirm a moderate risk of debt distress

(Figure A1 and A2,Table 3A). All three stock indicators as well as the external debt service-to-export ratio remain under their respective thresholds even under the standardized stress tests. However, the external debt service to-revenue-ratio—temporarily breaching its threshold level in the baseline scenario—increases to above 30 percent under the most extreme shock which constitutes a one-time 30 percent real depreciation relative to the baseline in 2015. While having a more moderate impact, standardized shocks to non-debt creating flows, growth, or financing conditions would also imply breaches of the debt service-to-revenue threshold.

B. Public Debt Sustainability Analysis

Baseline scenario

6. Additional risks arise from the high level and rising trend of domestic debt, as indicated by the total public debt dynamics (Table 4, Figure A3). Despite the upward revision in the discount rate to 5 percent, stock indicators of public debt are still close to the 2013 assessment levels. However, owing to deteriorated domestic and external borrowing conditions, and in line with the external debt sustainability assessment, the total public debt service-to-revenue ratio (including payments on external and domestic debt) has deteriorated. It is now projected to increase to 45 percent in the long run, thus absorbing a large part of revenues and leaving the country vulnerable to shocks.

Table 4.

Indicators of Public Debt Vulnerabilities

(Baseline)

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Stress tests and customized scenario

7. Fiscal policy will have to be tighter than in the past to prevent unsustainable debt dynamics (Figure A3, Table A4). Fixing the primary balance at its 2013 level, or growth and the primary balance at 10-year historical averages, confirms that the historical fiscal stance would not be sustainable in the long run; the PV of public debt-to-GDP ratio would be quickly approaching the benchmark (set at 74 percent for strong policy performers), and debt service would soon absorb most of revenues. Consistent with the results of the external debt sustainability analysis, a one-time 30 percent real depreciation in 2015, relative to the baseline, is the most extreme shock. It would set the debt service-to-revenue ratio on a rapidly increasing path, in the absence of corrective policy measures. The standardized shock to other debt creating flows captures contingent liabilities that could arise from SOE or other potential claims that have not been identified. Any potential financial sector contingent liabilities would also be subsumed in such a standardized shock. This shock would shift debt ratios upwards, but not change the dynamics.

8. Further consolidation of about 2 percentage points of GDP in 2014, combined with a more ambitious medium-term adjustment, would set the debt dynamics on a more favorable path (Figure 1). The additional fiscal adjustment would set off a virtuous cycle where lower fiscal deficits and falling interest rates would create room for higher social and infrastructure spending, a reduction in tax rates, and a crowding in of private sector activity. As a result, growth would be higher, the public debt ratio would decline, and debt service would fall below 30 percent of revenue in the long run.

Figure 1.
Figure 1.

Public Debt Vulnerabilities (Active Scenario)

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A003

Conclusions

9. Ghana's public debt situation has worsened since the last DSA. The updated assessment suggests that the risk of distress, while remaining moderate based on an assessment of external public debt, has increased, and Ghana's debt service-to-revenue ratio is approaching high-risk levels. The analysis does not include the liabilities of the central bank—some of which result from the need to sterilize government financing operations—nor the debt of public enterprises that is not guaranteed by the government. Hence, risks could be heightened further, as a result of these institutions' liabilities.

10. Robust growth and fiscal consolidation are essential to maintaining a moderate debt distress rating. Under the baseline, which incorporates the authorities' gradual adjustment plans together with staff's more conservative growth assumptions, the PV of public debt is expected to hover around a still high level of 54 percent of GDP, and the total public debt service-to-revenue ratio is projected to increase above 45 percent in the long run. Additional fiscal adjustment could set these indicators on a more favorable path.

11. The authorities agreed with the thrust of the analysis, but deemed staff's macroeconomic projections too pessimistic. In particular, they stressed that the growth outturn for 2013 is likely to be revised upward and saw stronger economic growth also for 2014.

Figure A1.
Figure A1.

Indicators of Public and Publicly Guaranteed External Debt under Different Scenarios, 2013–2033 1/

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A003

Sources: Country authorities; and staff estimates and projections.Scenarios, 2013-20331/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Figure A2.
Figure A2.

Probability of Debt Distress of Public and Publicly Guaranteed External Debt under Different Scenarios, 2013–2033 1/

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A003

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. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; and in e. to an Exports shock and in f. to a One-time depreciation shock
Figure A3.
Figure A3.

Indicators of Public Debt under Different Scenarios, 2013–2033 1/

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A003

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.
Table A1.

External Debt Sustainability Framework, Baseline Scenario, 2010–2033 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and Ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table A2.

Public Sector Debt Sustainability Framework, Baseline Scenario, 2010-2033

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table A3.

Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2013–2033

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after.

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table A4.

Sensitivity Analysis for Key Indicators of Public Debt, 2013-2033

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

1

Ghanaian authorities. The previous DSA

2

The discount rate was increased to 5 percent as of October 2013.

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Cover IMF Staff Country Reports
Ghana: Staff Report for the 2014 Article IV Consultation
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2014: Issue 129
Publisher:
International Monetary Fund
ISBN:
9781616355609
ISSN:
1934-7685
Pages:
73
DOI:
https://doi.org/10.5089/9781616355609.002
  • Figure 1.
    View in gallery
    Figure 1.

    Public Debt Vulnerabilities (Active Scenario)

  • Figure A1.
    View in gallery
    Figure A1.

    Indicators of Public and Publicly Guaranteed External Debt under Different Scenarios, 2013–2033 1/

  • Figure A2.
    View in gallery
    Figure A2.

    Probability of Debt Distress of Public and Publicly Guaranteed External Debt under Different Scenarios, 2013–2033 1/

  • Figure A3.
    View in gallery
    Figure A3.

    Indicators of Public Debt under Different Scenarios, 2013–2033 1/

Figure 1.

Public Debt Vulnerabilities (Active Scenario)
Figure A1.

Indicators of Public and Publicly Guaranteed External Debt under Different Scenarios, 2013–2033 1/
Figure A2.

Probability of Debt Distress of Public and Publicly Guaranteed External Debt under Different Scenarios, 2013–2033 1/
Figure A3.

Indicators of Public Debt under Different Scenarios, 2013–2033 1/