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Debt-to-GDP not best approach to measure debt level – financial experts

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Adnan Adams Mohammed
Financial experts have raised concerns on the country’s debt to Gross Domestic Product (GDP) is measured, saying it is not an effective approach to determine abi
lity to service the debt, but prefers debt-to-revenue measure.
The experts are of the view that, the government needs to focus on its ability to pay back its loans (that is, debt servicing capacity – principal and interest) which comes only from government’s Free Cash Flow (FCF), where FCF means, revenue less non-discretionary expenses. But, GDP is not a measure of government’s FCF; albeit there could be some correlation.
Blomberg last week reported that, Ghana’s debt surged to the highest in at least four years as the government tries to plug a budget gap that’s higher than projected. Total debt was at US$38.9 billion at the end of March, up 16% from a year earlier and the highest since March 2015, when the central bank started publishing these numbers in dollars. As a percentage of gross domestic product, debt rose to 58% in the month compared to 50% a year ago. More than half of that were external loans.
A financial expert and former boss of Ghana National Petroleum Corporation (GNPC), Alex Mould commenting on th publication by Blomberg, which measured the country’s debt to revenue, said from a cash management perspective, he thinks the government needs to focus more on its own revenue vis à vis government ability to service its debt.
“GDP is not really a good indicator as it includes revenues that do not accrue to government directly, such as, total cocoa revenue (where 60-70% go to the farmer) and total petroleum revenue (only 20% accrues to government).”

The governor of Bank of Ghana, Ernest Addison at MPC press conference, last week said the government missed its first-quarter revenue target by almost 20%, resulting in a higher-than-projected budget shortfall.

“My main concern is that the pace of revenue growth has lagged increasing debt-service cost,” Gregory Smith, a London-based fixed-income strategist at Renaissance Capital Ltd., said by phone. “We’re concerned that fiscal slippages including payment arrears may return as we build up to 2020 election.”

The nation’s budget deficit target for 2019 is 4.2% of GDP, compared with a shortfall of 3.8% of GDP last year.

Ghana exited a four-year extended credit facility program with the IMF in April this year, pledging to maintain fiscal discipline without the watch-dog role of the Washington-based institution. The nation raised US$3 billion in Eurobonds in March this year.

Meanwhile, Mr Mould is not much alarmed with the increasing debt of the country if only they are put to right use. “What is relevant is for government to be transparent and prudent on the use of the debt incurred.
“If government is using debt to pay for consumption and not putting the debt into productive use where there will be incremental revenue accruing to the country, thus increasing the GDP which will result also in increased taxes for government that can be used to pay back the loans taken, then this gives us (and the other stakeholders like IMF and WB) some discomfort,” he suggested.
But, where “government behaves arrogantly” and does not believe that we the citizens need to know these things then there is need for us to rise up and encourage them to do the right things, he added.

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