Poor debt management, sluggish lending could stifle economic growth

On July 28, 2021, 4:04 AM

The Monetary Policy Committee (MPC) has warned that inefficiency in managing the country’s debt and sluggish bank lending could affect economic growth amid the third wave of the COVID-19 pandemic.

This, in effect, could dent the gains the country has made in implementing economic recovery measures in the wake of the virus.

“At 76.6% of the Gross Domestic Product (GDP) in May 2021, the level of public debt raises debt sustainability concerns and the committee reiterates the importance and urgency of fiscal consolidation efforts,” the MPC said in a statement on Monday, July 26.

“The growth rebound, which began in the last quarter of 2020, has continued into the first half of 2021. However, the committee was concerned about the continued sluggishness in new lending by banks, which could undermine the growth momentum,” the MPC warned.

Data available to The Ghana Report shows that the country’s current account deficit for the first half of 2021 was estimated at $926.1 million (1.3% of GDP).

This was $378.1 more than the $548 million (0.8% of GDP) for the same period in 2020.

This situation was attributed to the lower trade surplus and higher net investment income outflows, as well as revenue underperformance, as the budget deficit exceeded its target in the first five months mainly on the back of revenue underperformance.

“Greater efficiency in debt management would be required, especially in the face of potential further tightening of global financing conditions, which could heighten rollover risks and access to new financing in the outlook,” the committee emphasised.

This slow growth in lending reflects increased credit risks because of uncertainties in the business environment due to the impact of COVID-19 pandemic on the real sector, coupled with very high yields offered on government securities due to increased borrowing.

Due to this, crowding-out effect has continued to keep the credit to GDP gap below the long-term trend, and is likely to delay recovery of the economy.

Not only that, the committee has warned that, such a situation could discourage banks from strengthening their credit underwriting processes to manage credit risks from lending to underserved sectors of the economy.

The MPC therefore recommended that, “going forward, expenditure has to be aligned to revenue performance to support the fiscal consolidation efforts.”

Just about a week ago, the International Monetary Fund (IMF) asked the government to put in place measures to deal with its debt sustainability.

In its July 2021 Article IV Consultation Report on Ghana, the IMF said while continuing its ongoing structural reforms, the country needed to deliver a sustainable, inclusive, and green economic recovery.

This effort was for the country to cement the gains made through the implementation of macroeconomic policies to contain the COVID-19 pandemic.

The international financial institution noted that though Ghana had seen encouraging signs of an economic recovery, such recovery remained uneven across sectors of the local economy.

While noting that risks to Ghana’s capacity to repay have increased, the report noted that they were still manageable, adding that Ghana’s capacity to repay the Fund remained adequate.

Nonetheless, IMF stressed that fiscal consolidation was needed to address debt sustainability and rollover risks, noting that, “Ghana continues to be classified at high risk of debt distress.”

“To protect the most vulnerable, considerations could be given to more progressive revenue measures and a faster return to the pre-pandemic level of spending, with a shift towards social, health, and development spending,” it recommended.

Details of the MPR

Meanwhile, the committee maintained the Monetary Policy Rate (MPR), the rate at which the Bank of Ghana (BoG) lends to commercial banks, at 13.5%.

This is the first time the MPR has been maintained since a cut from 14.5% to 13.5% in May, this year.

The apex bank said it held the MPR at the previous rate because the “headline inflation has eased sharply and reverted within the medium-term target band, driven mainly by the tight monetary policy stance and some base drift effects.”

Other considerations that were made in this regard include the uneven vaccination across regions, rising COVID-19 infection rates fuelled by delta variant, cases of vaccine hesitancy and divergence in the recovery across jurisdictions.

Story By Francis Ntow