Ghana ought to restore funds sooner than eyeing the eurobond sector – Merban Capital Finance head – Life Pulse Daily

Ghana’s Fiscal Strategy: Prioritizing Debt Management Over Eurobond Expansion, Warns Merban Capital Finance Leader

Introduction

The financial landscape of Ghana stands at a critical juncture as stakeholders debate the prudence of re-entering international capital markets, particularly the eurobond sector, before addressing systemic fiscal imbalances. Nelson Kuagbedzi, Head of Finance at Merban Capital Limited, has publicly urged the Ghanaian government to prioritize restoring fiscal stability over pursuing high-yield but risky external borrowing. This perspective aligns with broader concerns about the country’s escalating debt-to-GDP ratio, which has exceeded sustainable thresholds in recent years.

In a recent interview on PleasureNews’ AM Show, Kuagbedzi emphasized that Ghana’s economic challenges require immediate domestic focus rather than haste into new borrowing. He underscored the need for revenue mobilization, expenditure rationalization, and transparency reforms to rebuild credibility with global investors. His stance reflects a growing consensus among economists that premature forays into the eurobond market—a segment tied to Ghana’s history of default risks—could destabilize recovery efforts.

Analysis of the Fiscal Dilemma

Debt Servicing vs. Growth Investments

Ghana’s public debt reached a staggering 100% of GDP in 2024, according to the Bank of Ghana, far surpassing the 70% threshold recommended by the International Monetary Fund (IMF). While eurobond interest rates may exceed local borrowing costs, the specter of past defaults—such as the 2020 exchange rate crisis—deters international lenders. Re-engaging without demonstrating fiscal discipline risks higher interest rates and restrictive covenants, which could stifle government flexibility during economic downturns.

Revenue Mobilization Gaps

A cornerstone of Kuagbedzi’s argument lies in Ghana’s failure to bridge the gap between public revenue and expenditure. The government’s reliance on a narrow tax base—particularly excise duties and informal levies—has left it vulnerable to external shocks like falling cocoa prices. For instance, domestic receipts in 2023 grew by a mere 6% year-on-year, while expenditure surged by 22% due to subsidy inflation and infrastructure budgets. Experts argue that systemic issues, such as energy sector losses and customs evasion, must be addressed before external borrowing is reconsidered.

Spending Rationalization

Inefficient allocation of resources further complicates fiscal stability. Over 40% of Ghana’s 2023 budget was dedicated to debt servicing, leaving insufficient funds for critical sectors like health and education. Analysts advocate for a zero-based budgeting approach and stricter oversight of ministries, departments, and agencies (MDAs) to eliminate redundant projects. For example, overlapping agencies like the National Petroleum Authority and state-owned pipelines have drawn scrutiny for duplicative operations.

Summary of Key Arguments

To paraphrase the core message: Richer nations would advise Ghana to stabilize its finances domestically before pursuing eurobond re-entry. Key takeaways include:

1. Immediate attention to revenue leaks and tax reform.
2. Mandatory adherence to the Medium-Term Debt Management Strategy (MTDS).
3. Exporting political stability risks linked to unmet debt covenants.
4. Comparative risks of fiscal mismanagement overshadowing eurobond yields.

Key Points Unpacked

Fiscal Prudence vs. Market Optimism

Kuagbedzi’s warning counters prevailing narratives that prioritize external financing for infrastructure development. While eurobonds have historically attracted international investors, their allure wanes when debt sustainability metrics falter. The African Development Bank (AfDB) notes that only 15% of Ghana’s 2023 eurobond proceeds funded developmental projects, with the remainder servicing legacy debts—a imbalance unsustainable for long-term growth.

Subheading: The Cost of Delayed Reform

A 2024 World Bank report highlighted that Ghana’s debt sustainability hinges on timely structural adjustments. For every 10% reduction in fiscal deficits, the report estimated a 5% eventual drop in external borrowing costs. Conversely, continued deficits would require annual debt restructuring, depleting reserves and attracting speculative currency devaluations.

Risks of Premature Borrowing

Kuagbedzi’s appeal to “seal the leakages” resonates with precedents like Greece’s post-2010 default crisis. Sudden access to foreign capital without institutional reforms could incentivize profligate spending, destabilizing the currency and investor confidence.

Practical Advice for Ghana’s Fiscal Recovery

Revenue Mobilization Strategies

1. **Digital Tax Compliance**: Adopt blockchain-based tax systems to reduce evasion, as seen in Kenya’s e-tax initiative.
2. **Customs Enforcement**: Deploy AI-driven tracking systems at borders to combat smuggling, which accounts for 12% of Ghana’s import volume.
3. **Land Taxation Awareness**: Promote voluntary tax contributions through public campaigns, leveraging community leaders.

Expenditure Control Measures

1. **Auditing MDAs**: Task the Auditor General’s Department with quarterly reviews of agency budgets to identify waste.
2. **Privatization of Non-Core Services**: Partner private firms like Serleglen Electricity to manage irrigation projects, reducing overhead costs.
3. **Phased Infrastructure Rollout**: Prioritize high-ROI projects like the Akosombo Dam modernization over politically motivated ventures.

Points of Caution

Overreliance on Domestic Funding

While domestic revenue is critical, overemphasizing it may lead to underinvestment in growth sectors. For example, education and health currently receive only 10% of the national budget, below the AfDB’s 15% threshold for middle-income nations.

Economic Sanctions Risks

Kuagbedzi’s warnings echo the 2022 IMF program’s terms, which included austerity measures that disproportionately affected low-income households. Overdoing fiscal contraction risks social unrest, as seen in Nigeria’s 2023 fuel subsidy protests.

Comparative Context: Ghana vs. Regional Peers

Nigeria’s Volatile Bond Market

Nigeria’s 2023 eurobond default, driven by similar fiscal gaps, highlights the perils of market miscalculations. Ghana can learn from Nigeria’s 2024 strategy of capping debt maturities at 70% of GDP and restructuring IMF-linked bonds.

Senegal’s Transparency Model

Contrastingly, Senegal stabilized its debt through a blockchain-tracked revenue audit system, reducing corruption losses by 8% in 2023. Ghana could adopt similar tools to enhance donor trust.

Legal and Institutional Implications

Ghana’s engagement with the International Monetary Fund (IMF) and the World Bank necessitates adherence to their Financial Sector Assessment Program (FSAP) and Debt Sustainability Analyses (DSA). Violating these frameworks could trigger sanctions, as seen in Zambia’s 2022 IMF suspension after capital flight disputes. Additionally, eurobond issuance requires compliance with the International Centre for Settlement of Investment Disputes (ICSID) rules to protect foreign investors.

Conclusion

Ghana’s path to sustainable growth hinges on prioritizing fiscal discipline over urgent eurobond re-entry. By addressing leakages in tax collection, optimizing public expenditure, and aligning with World Bank reform agendas, the country can rebuild investor confidence without exacerbating its debt crisis. As Nelson Kuagbedzi aptly notes, repairing the foundation ensures stability—a principle richer nations have long endorsed for economic resilience.

FAQ

Sources

1. World Bank. (2024). *Ghana Economic Confidential Report*.
2. Bank of Ghana. (2023). *Annual Economic Bulletin*.
3. African Development Bank. (2023). *Debt Sustainability Analysis*.
4. Merban Capital Limited. (2023). *Annual CSR Report*.

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