Generally, Government debt as a percent of GDP is used by investors to measure a country's ability to make future payments on its debt, thus affecting the country's borrowing costs and government bond yields. Ideally, every country borrows but the danger is when the money borrowed is not invested strategically into developing the country so that the country can finance its debts.
To simplify this,suppose you decide to borrow from a bank. The bank tells you that you can only borrow up to 50% of your income. This is because the bank considers that about 25% of your salary goes to taxes and 25% goes to your living expenses. Note that the loan to repay will be the principal ( which is the actual loan you took) and the interest. The principal is fixed but the interest you need to pay on the loan declines as you continue to repay your loan. Based on these, if your current share of debt(monthly loan repayments) to your GDP (monthly income) is 0% the bank assumes you are low-risk based on your disposable income but high risk based on your lack of credit history. Thus, the bank decides to lend you a loan worth 10 % of your income.
Now, assuming after 6 months the bank realises your repayments are reasonable they suggest that you can top up your loan since you have lowered your risk of not being credit worthy based on your credit history. As a result, your debt-to-GDP ratio is now 30%. Therefore the bank re-assess your risk level to be moderate. Hence, your rate of repayments causes your cumulative debt-to-GDP rate ratio to decline ( that is the sum of all the debt you owe and the sum of all the income you earned over the term or period of the loan). Therefore, ideally it is not the proportion of debt to gdp that should trouble populace but the rate at which that ratio grows and how sustainable that growth rate is.
Other factors
Aside debt repayments, the debt-to-GDP ratio changes with the exchange rate (which in this case is the value of a country's money in comparison to the lending country's money). This time, assume your bank uses flexible interest rates which are rates that change according to the inflation rate( to simplify it). Assume that the inflation rates increase which increase the interest rate on your loan so that your debt-to-GDP is now 47% which automatically makes you a high risk borrower ( in a country case this can cause the lending rate offered to you to be higher than the low risk countries OR scare potential lenders from lending to you). So although you were to repay 30% of your income , based on current conditions you owe 47% of your income to the bank. On the other hand, if inflation fell, the interest rate on your loan reducing your debt and hence your debt-to-GDP ratio.
However, changes in the exchange rates (inflation rates for individual) do not only determine the debt-to-GDP ratio. Other determinants include the changes in the debt itself and changes in the GDP. In considering changes to the debt itself, assume that a friend or family member decide to give you a huge amount of money for free (not another loan) to relieve you of your debt burden and you responsibly use that money to offset the principal of your loan which reduces your debt and hence your debt to GDP ratio to say 25% making you moderate risk and vice versa if otherwise. An example of this was the HIPC relief that President Kuffuor got. Now, assuming that instead of using the borrowed money in a non-profit venture , you decide to invest it in a business that boosts your GDP. Example: Government decides to invest in entrepreneurs while ensuring that these entrepreneurs are paying tax diligently. Note that these entrepreneurs will not only pay corporate tax but their workers also pay income taxes. Another example is when government decides to invest in developing the agriculture sector by improving the technical efficiency of farmers so that farmers can grow more crops and distribute the crops in the local markets and international markets. Now,since more people are employed, new businesses are created and government is investing in the country, consumer spending , firms spending and government spending rises which increases GDP. With the increase in GDP , the debt to GDP ratio falls.
So when GDP rises, the question that is raised is what is fuelling the rise?
s it just paper economics or practical economics?
f government spending is the sole increasing element of GDP over time, citizens must question what the government expenditure is being directed into and whether it is worthwhile. For instance, in Ghana, President Kufuor's government mainly focused on roads, remodelling of schools, presidential palace and accessibility of education, health and food for all but unfortunately the accessibility programs are in a limbo due to mismanagement and lack of funds. SImilarly, President Mills' government mainly focused on repaying government debts and increasing public sector income which unfortunately has repaid people who were not supposed to be paid. Moreover, President Mahama's government started with reviving the poultry industry and is now considering reviving the country's energy sector which allegedly has similarly not been smooth-sailing. Either of these programs, are well-thought out and formidable but the biggest challenge retrogressing the positive impact of these efforts is the amount that some public officials, irrespective of the political party, pocket in the name of being 'little'. Even when the 'little' significantly slows the sustainable growth of the country. But corruption and 'toothless blaming' is a topic for another day.
Current situation of debt in Ghana
According to the bank of Ghana, the figure below illustrates how Ghana's average annual debt-to-GDP has been over the years:
Variations in Ghana's debt-to-GDP ratio over the years
source: tradingeconomics.com
According to the IMF,
Debt sustainability analysis report in 2013 suggested that 'Ghana’s risk of debt distress had risen, but remained moderate driven by expansionary fiscal policy in 2012 which ensured that Ghana’s public domestic and external debt declined. However, the external debt burden indicators are projected to remain well below what is required. However, if the planned fiscal interventions continues beyond the medium term, the total public debt is projected to stabilize at approximately 52 percent of GDP in the long run, with debt service absorbing more than 40 percent of government revenue.
Debt sustainability analysis as at March 2015 depicted that Ghana is now at a high risk of debt distress mainly due to large currency depreciation and higher external indebtedness. 'However, if fiscal policies are implemented as planned under the program, total public debt is projected to decline from 70 percent in 2014 to 58 percent of GDP in 2019 (following an initial increase to 72 percent of GDP in 2015) and 39 percent in 2034, with total public debt service absorbing around 40 percent of government revenue in the long run.' Any sizable deviation from the fiscal consolidation program would stall the projected decline in the public debt path and increase further public debt vulnerabilities. High levels of gross financing need are also worrisome. Furthermore, the bullet feature of Eurobonds accentuates Ghana’s roll-over risk and its vulnerability to global financial conditions in the medium term.'
Why the distinction in the results from IMF and Bank of Ghana?
The thoughts that baffles most Ghanaians is how the Bank of Ghana seems to discount the quite alarming debt-to-GDP ratio proposed by the IMF (which is what journalists in Ghana inform Ghanaians about). In 2014, the Bank of Ghana informed Ghanaians that the debt-to-gdp ratio was 55% which the IMF rebutted to be rather 72%. In fact, as at yesterday, 15th September 2015 , the finance minister on joy news stated that they arrived at their estimate to be 62% and not 71% with the assumption that Ghana's exchange rates stabilised (that is when 1 cedi = 1 USD again). Meanwhile, in reality what we owe is 71% of our gdp until we achieve stabilising the Ghana cedi.
Thus, with reference to the explanations above the media is right to say that what Ghana actually owes as a share of its GDP , based on current conditions, is 71%. Is the country considering to stabilize the currency? When economists complained about the depreciation of cedi some few months ago, the finance minister of Ghana suggested that the depreciation of the currency is strategic to improve exports. Meanwhile there was clear evidence that agriculture exports had declined within that same period (see FAOSTAT). On the other hand, the country is still expecting to increase its external debts before end of this year, via Eurobonds, when the report from IMF clearly states that the un-sustainability of our debts is not only because of our declining currency but also our increasing external debts. At the same time the energy crisis in the country is eroding our GDP growth making it more and more difficult for our GDP to catch up with our debt rate (source: ISSER).
Does this mean Ghana is HIPC?
According to the IMF, HIPC is country that is poor and faces a debt burden it cannot manage.
Is Ghana still a poor country?
According to the world bank, Ghana is a low middle income country who has successfully reduced the national average poverty rate to 28.5% but still has north Ghana being 3 times more poor than south Ghana (over 60%). The country also has a large agriculture sector in terms of employment , land share and contribution to GDP, which is not only under-developed but has a large section of the sector being poor and stifled with import policies and lack of structural policies to protect domestic farmers (http://www.ruralpovertyportal.org/country/home/tags/ghana). In sum, Ghana is still very poor though less poor.
A debt burden is simply the debt-to-GDP ratio.
'Cannot manage' refers to the sustainability of the debt. That is a debt that cannot be managed under traditional debt relief mechanisms.
As of April 2015, Ghana passed the post-completion point making it eligible for the HIPC initiative assistance. In as much as the idea of most Ghanaians is that Ghana after the initial initiative should have developed so well that it would not require a HIPC initiative. Well, according to IMF, despite some progress we are not yet HIPC-free. In fact we qualified for full debt relief which is not because governance was entirely terrible but because Ghana established a further track record of good performance under programs supported by loans from the IMF and the World Bank and was able to adopt and implement the Poverty Reduction Strategy Paper for at least a year.
Conclusion
As to whether Ghana's government will deem it necessary or not to go for HIPC assistance since it is HIPC than go for the Eurobond OR do nothing will depend on whether they are convinced that they agree with IMF that they need the HIPC assistance. However, according to IMF, as of April 2015 Ghana qualifies for full debt relief under HIPC because of its poor state and inability to manage its debt.
Debt sustainability analysis report in 2013 suggested that 'Ghana’s risk of debt distress had risen, but remained moderate driven by expansionary fiscal policy in 2012 which ensured that Ghana’s public domestic and external debt declined. However, the external debt burden indicators are projected to remain well below what is required. However, if the planned fiscal interventions continues beyond the medium term, the total public debt is projected to stabilize at approximately 52 percent of GDP in the long run, with debt service absorbing more than 40 percent of government revenue.
Debt sustainability analysis as at March 2015 depicted that Ghana is now at a high risk of debt distress mainly due to large currency depreciation and higher external indebtedness. 'However, if fiscal policies are implemented as planned under the program, total public debt is projected to decline from 70 percent in 2014 to 58 percent of GDP in 2019 (following an initial increase to 72 percent of GDP in 2015) and 39 percent in 2034, with total public debt service absorbing around 40 percent of government revenue in the long run.' Any sizable deviation from the fiscal consolidation program would stall the projected decline in the public debt path and increase further public debt vulnerabilities. High levels of gross financing need are also worrisome. Furthermore, the bullet feature of Eurobonds accentuates Ghana’s roll-over risk and its vulnerability to global financial conditions in the medium term.'
Why the distinction in the results from IMF and Bank of Ghana?
The thoughts that baffles most Ghanaians is how the Bank of Ghana seems to discount the quite alarming debt-to-GDP ratio proposed by the IMF (which is what journalists in Ghana inform Ghanaians about). In 2014, the Bank of Ghana informed Ghanaians that the debt-to-gdp ratio was 55% which the IMF rebutted to be rather 72%. In fact, as at yesterday, 15th September 2015 , the finance minister on joy news stated that they arrived at their estimate to be 62% and not 71% with the assumption that Ghana's exchange rates stabilised (that is when 1 cedi = 1 USD again). Meanwhile, in reality what we owe is 71% of our gdp until we achieve stabilising the Ghana cedi.
Thus, with reference to the explanations above the media is right to say that what Ghana actually owes as a share of its GDP , based on current conditions, is 71%. Is the country considering to stabilize the currency? When economists complained about the depreciation of cedi some few months ago, the finance minister of Ghana suggested that the depreciation of the currency is strategic to improve exports. Meanwhile there was clear evidence that agriculture exports had declined within that same period (see FAOSTAT). On the other hand, the country is still expecting to increase its external debts before end of this year, via Eurobonds, when the report from IMF clearly states that the un-sustainability of our debts is not only because of our declining currency but also our increasing external debts. At the same time the energy crisis in the country is eroding our GDP growth making it more and more difficult for our GDP to catch up with our debt rate (source: ISSER).
Does this mean Ghana is HIPC?
According to the IMF, HIPC is country that is poor and faces a debt burden it cannot manage.
Is Ghana still a poor country?
According to the world bank, Ghana is a low middle income country who has successfully reduced the national average poverty rate to 28.5% but still has north Ghana being 3 times more poor than south Ghana (over 60%). The country also has a large agriculture sector in terms of employment , land share and contribution to GDP, which is not only under-developed but has a large section of the sector being poor and stifled with import policies and lack of structural policies to protect domestic farmers (http://www.ruralpovertyportal.org/country/home/tags/ghana). In sum, Ghana is still very poor though less poor.
A debt burden is simply the debt-to-GDP ratio.
'Cannot manage' refers to the sustainability of the debt. That is a debt that cannot be managed under traditional debt relief mechanisms.
As of April 2015, Ghana passed the post-completion point making it eligible for the HIPC initiative assistance. In as much as the idea of most Ghanaians is that Ghana after the initial initiative should have developed so well that it would not require a HIPC initiative. Well, according to IMF, despite some progress we are not yet HIPC-free. In fact we qualified for full debt relief which is not because governance was entirely terrible but because Ghana established a further track record of good performance under programs supported by loans from the IMF and the World Bank and was able to adopt and implement the Poverty Reduction Strategy Paper for at least a year.
Conclusion
As to whether Ghana's government will deem it necessary or not to go for HIPC assistance since it is HIPC than go for the Eurobond OR do nothing will depend on whether they are convinced that they agree with IMF that they need the HIPC assistance. However, according to IMF, as of April 2015 Ghana qualifies for full debt relief under HIPC because of its poor state and inability to manage its debt.