The debt of many developing countries is usually in two components – debt it owes in its own currency and debt it owes in the currency of other countries. So there are debts Ghana owes in cedis and debt it owes in dollars.
Why would the government borrow in dollars? The interest rates are lower, it can borrow much larger amounts, it reduces pressure on the exchange rate by meeting the demand for dollars and it does not reduce the amount of money available for borrowing by the private sector.
In fact, Ghana has had an affinity with foreign debt for a long time because of the low saving rate in the country. The chart below shows external debt to GDP and domestic debt to GDP since 2000.
From 2001-2004 Ghana received a debt relief in nominal terms of US$3.7bn equivalent to 56.2% of the total debt in 2000 values. And that is why we see the debt falling like that in the chart. The reason for the drastic fall in 2006 is because of the rebasing of the economy in 2010 with 2006 as the base year. These points are important because I anticipate questions about why I would be preaching doom about external debt to GDP at 43% when we’ve been at 153% before.
We are a lower-middle-income country borrowing from the international bond market and our creditors are not going to give us any debt relief. Let’s take a look at Argentina which defaulted on their sovereign bonds. 15 years after they defaulted in 2001 they have finally had to borrow additional funds to pay the old creditors before they can even start borrowing for themselves.
We issued our first Eurobond in 2007 at an interest rate of 8.5%. Since then we have issued three more which I show in the table below from information I have gleaned from a variety of sources.
So we went for the first one and then a second one to pay for the first one and then a third and fourth to basically to pay our domestic short-term debt to give the government some fiscal space. That makes sense if we had a stable exchange rate but unfortunately we do not have that and the interest payments on these dollar loans take more and more from our revenue as the cedi depreciates against the dollar.
In fact, the Ministry of Finance and Economic Planning (MoFEP) themselves admitted that our debt to GDP ratio was basically at the mercy of the exchange rate due to the huge component of the external debt in our public debt. We see this below.
The Ministry meant that the government was not really taking on new debt and that it was the exchange rate moving our debt to GDP levels up. But that is in fact a stunning admission of the helpless situation we have driven ourselves into due to our voracious appetite for foreign debt.
Regular CediTalk readers will know about how worried I’ve been about a potential hike in the US Fed’s interest rates because it will lead to a depreciation of the cedi against the dollar and also a fall in commodity prices which will hurt government revenue. The Institute of Chartered Accountants of England & Wales has identified Ghana as the African country most vulnerable to the Fed’s rate hikes and yet we have shown no signs of wanting to slow down on the international bond market. The fact that our last issue was at an interest rate of 10.75% even with a $400m world bank guarantee should stop us in our tracks!
When a country owes in its own currency, it has the ability to print all the money it wants to pay off the debts. In doing that it risks shooting inflation up and ensuring that no one ever lends to it at anything other than sky high rates. But there is still more control in such a case. And after all, the interest being paid on the debts is paid to citizens of the country who spend most of it in the country.
But when a country borrows in another currency, an act which has been referred to as the original sin of international finance it must painfully cough up the money because it cannot print another country’s currency. Greece cannot print euros and is having to suffer crippling austerity, pension cuts and unemployment at the request of its creditors. Angola, Venezuela, Iraq and Nigeria are having to repay through barrels of oil which are now much cheaper than they thought it would be when they took the loans from China. Mozambique just defaulted. And Ghana is undergoing an extended credit facility programme with the IMF which includes austerity and yet, I fear we are not learning our lessons.
The government may feel it is still in a better position now than other countries undergoing credit crisis but things can get very bad very fast. And with all the examples of just how bad things can get for countries with high external debt, we will have no excuse if we should fall in the same trap.