Ghana: Public Debt Worries For Private Sector

Ghana: Public Debt Worries For Private Sector

Ghana’s soaring public debt and its cumbersome tax system is hitting business hard, reports Francis Sackitey from Accra.

Despite Ghana’s highly touted macroeconomic growth, the private sector is not happy with the country’s high tax rates and domestic debt level. Both the Association of Ghana Industries and the Ghana Chamber of Commerce has expressed concern saying the situation does not augur well for businesses, especially in the private sector.

In November 2012, Ghana’s domestic debt stood at Ghc17.8bn ($9.3bn) compared with the Ghc11.8bn ($6.1bn) at the end of 2011. According to Kofi Wampah, the acting Governor of the Bank of Ghana, interest rate payment on domestic debt has shot up to Ghc1.6bn ($839m), a 35% growth rate over the same period in 2011.

Ghana has been battling with its domestic debts over the years. In 1990, Ghana’s domestic debt was less than 3% of national output, but made a leap to 25% in 1996. In 2011, government debt reached 43.40% of GDP. From 1990 to 2011, public debt averaged 62.55% per annum, reaching an all-time high of 125.40% in December 2000 and a record low of 26.20% in December 2006.

If the domestic debt at the end of 2000 was to be shared equally among Ghanaians (including babies), each Ghanaian would have carried a debt burden of about 420,000 cedis.

Extensive use of domestic borrowing can have severe implications for the economy. Domestic interest payments consume a significant part of government revenue, more if the associated interest rates
are higher than those on external debt.

In shallow financial markets, the interest cost on domestic debt increases with the debt stock as a large proportion of the debt is held in short-term instruments.

Since 2007, the country has issued two Eurobonds of $500m-$750m and two smaller domestic bonds, in an effort to deal with its public debt. Over the past months, Treasury Bill rates have risen astronomically due to the massive sale by the Bank of Ghana of short-term government debt as it sought to mop up excess liquidity to counter the weak exchange rate and the resultant inflationary pressure.

The President of the Ghana Chamber of Commerce, Seth Adjei-Baah, warned that if the government focused on borrowing from local banks, it would affect the cost of borrowing, crowding out the private sector.

Of equal concern to the private sector are the high level of taxes and the need for a tax reform. The private sector has complained that the refund arrangements for duty drawback and VAT drain their working capital. The Association of Ghana Industries have been calling on government to exempt companies with consistently good tax payments records from paying withholding taxes, to free resources for their business operations. “These exemptions and other enhanced tax reforms will help to make funds available for business operations in the industry where lack of capital has always been a problem,” the president of the association, Nana Owusu Afari, stated.

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