Ghana’s April 2017 $2.2 billion Eurobond issuance was the largest single-day debt issue by a sub-Saharan African economy. The debt issue could mark a turning point for Ghana’s economy if the sale proceeds are used to support diversification away from its resource dependence. Ghana should use macroeconomic policies to smooth the potential inflation and forex impact of increased flows, as a result of the debt issuance.
Ghana’s recent debt sale presents an opportunity
The cost of, and access to, finance is important for economic transformation in developing countries’ manufacturing sectors. However, among some firms in sub-Saharan Africa (SSA), the costs for borrowing are significantly higher than for their counterparts in Asia. Domestically, government crowding out of the banking sector, through public sector deficits or inflation, has driven interest rates higher. This is exacerbated by banking sector inefficiencies boosting yield spreads. Given this, policies promoting greater financial sector depth and breadth, alongside exchange rate and interest rate stability, are key to reducing the cost of finance and thus, encourage smaller manufacturers’ access to finance and greater transformation. These policies can improve the allocation of capital and financial deepening alongside industrial policy for structural transformation.
Recent developments in Ghana indicate that such a turnaround could be possible. Since 2014, Ghana has seen an approximate 80% depreciation of the cedi against the US dollar, which was driven by weaker export revenues as a result of the impact of lower global commodity and oil prices. A consequence of this has been that Ghana has received $918 million of financial assistance from the International Monetary Fund. This is combined with a previously undisclosed debt of $1.6 billion, which has contributed to significant fiscal deterioration and debt servicing costs.
And yet, Ghana’s most recent $2.2 billion sale of domestic bonds was the largest by an SSA economy in one day. Stabilisation in oil and commodity prices means that Ghana’s growth prospects are looking up. This sale could be a turning point for Ghana if the proceeds are used to support the productive economy and diversification away from its resource sector.
Ghana’s twofold challenge ahead
With increased access to global finance, Ghana now faces a twofold challenge. First, Ghana should ensure that its debt-sale proceeds are used to finance productive investments in support of diversification in its domestic economy. This is important for Ghana to build up resilience to future shocks. Ghana is a largely service sector economy, which comprises roughly 50% of its GDP. Outside of this, its top exports are resource-driven: gold, cocoa and crude petroleum, comprising respective export shares of 40%, 18% and 16% in 2015. However, the price outlook for gold, cocoa and crude petroleum is subdued with a risk of further commodity and oil price shocks – all of which reinforces the need for diversification in Ghana’s manufacturing base.
In the past, commodity price shocks have impacted on Ghana’s domestic currency, exacerbating domestic economic volatility – the cedi real effective exchange rate is approximately 33% lower since its 2008 peak. Monitoring the usage of Ghana’s debt sale proceeds is, therefore, crucial and should be a priority for Ghana’s policy-makers.
Ghana’s second challenge is in reducing its domestic cost of finance for entrepreneurs. Lending rates in Ghana have been persistently high, increasing from 26% in 2012 to 38% at the end of 2016. Given past fiscal mismanagement, the government should ensure that the proceeds are not used to finance its fiscal budget deficits, as this could keep interest rates elevated. The 19.75% interest rate recently paid by Ghana for its 15-year and 7-year domestic debt, and the 9.25% paid for its Eurobonds, demonstrate that raising funds is costly – compared to, for example, the 7.85% paid by Nigeria’s Eurobonds. It is vital for these costly efforts to translate into sustained growth returns.
Supporting greater lending capacity
Introducing domestic financial depth in Ghana could increase domestic lending capacity and access to finance for entrepreneurs. However, as we have recommended in the past, developing countries, such as Ghana, can best utilise bond inflows by first stabilising domestic prices as the capital inflow occurs, in order to prevent unwanted currency appreciation or domestic inflation pressure. And, second, by using the debt sale proceeds to plug economic gaps.
Ghana could stabilise domestic prices by supporting its growth through using macroeconomic policies (fiscal, monetary and exchange rate) to smooth the potential impact of increased inflows on inflation (which is at an elevated 13%) and on fiscal expansion. These policies will help counter exchange rate and interest rate rises. If necessary, the Bank of Ghana could also use the extra revenue to intervene to stabilise the cedi, to support manufacturing growth.
To aid diversification in manufacturing, Ghana’s industrial policy should include plans on how to monitor and use the proceeds from its debt sale. It could maximise the potential of short-term equity and private bond flows by supporting technological development in manufacturing and improved infrastructure, to avoid over-concentration of industry in urban areas and promote regional development. Cumulatively, these policies could help ensure that the proceeds of Ghana’s recent and future debt issuances help boost real structural transformation.