Issue longer tenor bonds to raise domestic financing-IFS


Accra, March, 14, GNA-The Institute for Fiscal Studies (IFS) has urged government to consider issuing longer term domestic bonds that are opened to foreign investors to finance the deficit so as not to crowd out the private sector.

  The 2017 revenue and expenditure estimates show that the budget will result in a deficit of GHC13,175.7 million, 6.5 percent of GDP for 2017.    
  To finance the deficit, government intends to borrow from both domestic and foreign sources; with a net domestic financing estimated at GHc14,579.5 million (7.1 percent of GDP), including additional financing from divestiture proceeds of GH¢1,829.2 million.
   Net foreign financing is estimated to constitute a net repayment of GH¢1,317.4 million, equivalent to 0.6 percent of GDP.
  This has raised concerns of an increase in the public debt as well as a possible crowding out of the private sector from the credit market, if government borrowed the estimated amount from the domestic credit market.   
  Already, access to and cost of credit is a major challenge to the private sector, as interest rates remain high.
  Mr Leslie Dwight Mensah, an Economist at IFS, said deficit would be financed entirely from domestic sources because of the huge principal payment on external debts that will be made in 2017; larger than the projected foreign inflows.
  “The risk from that is, a lot debt will be issued and that constrains the space for private sector borrowing, because it’s one market for loanable funds, and the monies either go to the government or the private sector,” he said, explaining that if government took too much of the loanable funds, the private sector would have less, leading to the crowding out effect.
  Speaking to the GNA at a press briefing on the IFS review of the 2017 Budget Statement and Economic Policy, he added that domestic borrowing by government could also cause interest rate pressures as the issuing of more domestic debt could reverse the trend of declining interest rates.
  He said the IFS anticipated the issuing of bonds, which were open to participation by foreign investors and urged government to issue more long term bonds to avoid the crowding out impact, in light of the critical role of the domestic private sector in the government’s agenda.
  “If you use longer tenor bonds, in which foreign investors can participate, then you raise more some of the borrowing from people outside Ghana with foreign currency and you limit the crowding out effect on your domestic private sector,” he stated.
  Mr Mensah said the IFS encouraged this approach of issuing longer tenure bonds to raise domestic financing by government so as to reduce reliance on foreign borrowing which comes, not only with interest rates impacts but also foreign exchange risks.
  He noted that this would also enable government to set benchmarks that the private sector can use to raise long-term financing, and reduce their reliance on bank financing, which is mostly short-term.
 Professor Newman Kusi, Executive Director of IFS, said there was the need to pursue a stronger fiscal consolidation strategy as macroeconomic stability largely depended on fiscal outcomes.
 He said government could have targeted a lower deficit ratio to minimise borrowing, or direct the earmarked funds above the proposed cap to fund some of the existing expenditure items, instead of funding new expenditure items brought on by new initiatives.
“Again, substantially reducing the fiscal deficit in 2017 would significantly reduce the rate of borrowing and thus the rate of debt build-ups and help stabilise the economy to create the enabling environment for ambitious growth policies to succeed later,” he stated.


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