Re Ghana’s Irresistible Borrowings

Reflections: ‘We don’t borrow to buy drinks and food’ – Mahama to critics, Citifm, 27 March 2014.

ABSTRACT

Debt Crisis: “By the end of 1990 the world’s poor and developing countries owed more than $1.3 trillion to industrialized countries. Among the largest problem debtors were Brazil ($116 billion), Mexico ($97 billion), and Argentina ($61 billion). Of the total developing-country debt, roughly half is owed to private creditors, mainly commercial banks. The rest consists of obligations to international lending organizations such as the International Monetary Fund (IMF) and the World Bank, and to governments and government agencies: export-import banks, for example. Of the private bank debt, the bulk has been incurred by middle-income countries, especially in Latin America. The world’s poorest countries, mostly in Africa and South Asia, were never able to borrow substantial sums from the private sector and most of their debts are to the IMF, World Bank, and other governments…The loan pyramid came crashing down in August 1982, when the Mexican government suddenly found itself unable to roll over its private debts (that is, borrow new funds to replace loans that were due) and was unprepared to quickly shift gears from being a net borrower to a net repayer… Though experts do not really understand why the crisis started precisely when it did, its basic causes are clear. The sharp rise in world interest rates in the early eighties greatly increased the interest burden on debtor countries because most of their borrowings were indexed to short-term interest rates. At the same time, export receipts of developing countries suffered as commodity prices began to fall, reversing their rise of the seventies. More generally, sluggish growth in the industrialized countries made debt servicing much more difficult.” [1]

Research, Information & Advocacy

It is not always true that irresistible huge borrowings shall bring infrastructural development to Africa and in this context Ghana, as President John Mahama had said. So far we are yet to be lectured or told about this African success story and here, on its decades of borrowings track records. Economically, most African countries such as Ghana, relies on the exploitation and export of natural commodities such as gold, diamond and oil, not forgetting agriculture production- farming and livestock. Although Ghana’s services sector; according to Index Mundi [2], accounts for some 50% of its Gross Domestic Product (GDP), it could be argued that it faces enormous challenges, making it difficult for governments to meet its projected annual targets due to bribery and corruption, tax evasion or under-performance.

Indeed Index Mundi also notes that Ghana’s economy has been strengthened by a quarter century of relatively sound management, a competitive business environment, and sustained reductions in poverty levels; it is observed that President Mahama faces challenges in managing new oil revenue while maintaining fiscal discipline and resisting debt accumulation. “Ghana is well-endowed with natural resources and agriculture accounts for roughly one-quarter of GDP and employs more than half of the workforce, mainly small landholders. Gold and cocoa production and individual remittances are major sources of foreign exchange. Oil production at Ghana’s offshore Jubilee field began in mid-December, 2010, and is expected to boost economic growth. Estimated oil reserves have jumped to almost 700 million barrels.” [2] Yet the recent production falls in cocoa and more importantly gold, adding to the laying-off a sizeable number of workforce in Anglo-Gold Ashanti, support Ghana’s uncertain revenue.

Thus as a third world or developing country such as ours, we might have every good intentions for borrowing to speed up our developmental deficits- both human and infrastructural. But the argument that the richer nations- such as the G8(7)- namely, Canada, France, Germany, Italy, Japan, Russia, United Kingdom and the United States, proceeded on the foundations of excessive borrowing calls for further investigation and appraisal if that was our measure. How could we comfortably compare hardware or a metal manufacturing country such as the Obama’s United States to a perishable or raw material producing country such as Republic of Ghana? The fundamentals of US’ tax base even makes this incomparable let alone the rewards and royalties of decades of US’ investments in research and development (R&D). The sidelines of poverty in Brazil and Argentina vitiate a further debate on this.

Michael Kelbaugh writes this about US’ debt: “As the national debt approaches $16.4 trillion, it is worth reminding ourselves why that debt should give us cause for concern. Government spending itself can be harmful because it crowds out private investment, redirecting resources to projects that are designed more for political than economic benefit. But the debt itself — outlays in excess of receipts — has consequences beyond that of even a “responsible” level of spending, since it represents payments that future generations will have to make. By racking up debt today, we are imposing a burden on our children.” Keynesians object arguing that debt does not hurt future generations, provided that “we owe it to ourselves.” Dean Baker states “As a country we cannot impose huge debt burdens on our children [since] the ownership of our debt will be passed on to our children. If we have some huge thousand trillion dollar debt that is owed to our children, then how have we imposed a burden on them?” The reasoning seems valid. Even if our children have to pay off our debt at a future time, they will only be paying it to other Americans. Thus, that generation will, on net, be no poorer because of the debt created by their parents. The debt merely causes a transfer of resources from taxpayers to bondholders. [3]

Yet Citifm Richard Mensah quotes President Mahama as saying [4]: “There are some who claim Ghana is borrowing too much and that it is increasing the nation’s debt, but I dare say if you borrow and use it prudently you are on the right course and that is what is important…government does not borrow money to use on drinks and food, we use the money to provide potable water and electricity to various communities.” So we provide below the background to threats of debt crisis culled from Internationalist Magazine for further analyses and on Ghana’s current debt, borrowings and vulnerable national revenue:

THE THIRD WORLD DEBT CRISIS

What is the Third World Debt Crisis?

How did it start?

Why does the debt keep growing?

What can we do?

Many developing countries have very large debts, and the amount of money they owe is quickly increasing. Trying to pay off the debt (debt service) has become a serious problem for these countries, and it causes great hardship for their people. Take the region of Sub-Saharan Africa, for example. This region pays $10 billion every year in debt service. That is about 4 times as much money as the countries in the region spend on health care and education.

How did the Debt Crisis start? At the end of the ’70’s, many oil-exporting countries had large amounts of extra money. They put this money into Western banks. The banks then loaned a lot of money to Third World countries for big development projects. However, several factors (a rise in world interest rates, a global recession, and low commodity prices) caused the size of these debts to start growing very fast; several countries began to fall behind in their payments.

The amount of money owed by developing countries has increased dramatically since the early 1980’s. These countries now owe money to commercial banks and also to organisations like the World Bank, the International Monetary Fund, and to First World governments. Why does the debt keep growing? It is especially difficult for developing countries to repay loans: Loans must almost always be paid in hard currency. Most loans to the Third World have to be repaid in hard currencies. Hard currencies are stable currencies; that means their value does not change very much. The Japanese yen, the American dollar and the Swiss franc are examples of hard currencies.

Developing countries have soft currencies – they go down in value. Therefore, when the value of a developing country’s money goes down (as it often does), the cost of its debt rises. It takes more of the country’s own currency to pay back the same amount of hard currency. The value of a country’s exports goes down. The value of the commodities that a Third World country exports can go down by large amounts. This makes it much more difficult for the country to repay its loans. In Latin America, for example, debt is growing faster than earnings from exports.

Refinancing loans can get countries into even more troubles: Refinancing is when more money is borrowed to pay off earlier loans. In theory, refinancing is a measure to help developing countries with their debt problems and sometimes it does this. However, it does not make good sense to take on new debts in order to service existing debts. If this happens, the result is that countries get deeper and deeper into debt. (This is called a ‘debt spiral.’) In addition, many of the loans to developing countries are made by governments or organisations like the IMF. These loans often carry strict conditions with them, like cuts in spending on health care, education and food subsidies. This makes life even worse for people in the indebted countries. What can be done?

Reschedule the debts:

This is when the terms of repaying the loan are changed and more time is allowed to repay the loan.

Debt swaps:

Some organisations have thought of clever ways to help developing countries lessen their debts.

UNICEF’s Debt for Child Relief is an example of how an organization helped some developing countries with debt problems.

In this program, UNICEF and international banks made a deal. Some of the money that poor countries owed the banks was not paid to the banks but was paid to UNICEF. Instead of the money, the banks received tax deductions. UNICEF collected the debt repayments in local currency (not hard currency) and then spent this money for programmes to help children inside the country.

Cancel the debts: Quite simply, the debts would no longer exist. The developing countries would not have to repay the loans and they would not have to pay the interest. After all, what do the developing countries really owe the developed world? They have repaid their loans many times over in interest payments. In addition, in many cases, developing countries have paid the First World more (in debt-servicing) than the Northern countries have given in aid, loans and investment.

From 1983-1989 a surplus of $165 billion went FROM countries receiving aid TO the countries who were ‘giving’ it. Again in 1994, the less developed countries paid out $112 billion more than they received. Of course, cancelling Third World debts now will not solve the problem in the future. To do that, we must change the present financial system, which is based on debt and interest payments; a system that keeps control in the hands of those who are rich and powerful.

Information comes from the article, ‘Currencies of Desire’, by Vanessa Baird (NI October 1998) and The A to Z of World Development (1998) edited by Wayne Ellwood (New Internationalist Publications Ltd)

Culled/Copyright: New Internationalist Magazine 1998, 1999

On that note, it is worth reproducing what has been said about the concerns of US’ domestic borrowings: “Yes, the projects that the present generation’s government chooses to finance, even while racking up a debt, might have a lasting value that compensates future generations by providing them with the fruits of a long-term investment they could not otherwise have, such as infrastructure or domestic oil production. But the guardian angels of the state are not very adept at selecting such services, even less so when decisions are made with the resources but without the consent of the unborn. Borrowing, then, remains the most politically feasible option for the government to finance its spending. Taxation will always be unpopular, and inflation makes its presence felt eventually. Borrowing the money, however, conveniently passes the bill to future generations- who will never realize that they have been cheated and robbed if we keep repeating the meaningless myth that we owe the debt to ourselves.” [3]

CONCLUSION

Our summary advocacy therefore, is: we must be very cautious in our debt-bondage and spending for we are just but natural or agricultural producing country, relying heavily on the mercies of God and nature, and arguably less capable not only in managing our own energy needs but also seasonal bumper harvest.

Researched and Compiled By Asante Fordjour for The OmanbaPa Research Group

 

JusticeGhana

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LEGENDS

GLOBAL: Worldwide

A RECESSION is a time when there is much less business than usual.

A COMMODITY is a product of farming, forestry, or mining that is bought and sold.

DRAMATICALLY: very greatly.

DEBT SERVICE: The amount of borrowed money and interest that you must regularly pay.

 

References

[1] Kenneth Rogoff (1991), “The Third World Debt Crisis”, http://www.econlib.org/library/Enc1/ThirdWorldDebt.html, date accessed, 29 March 2014

[2]Index Mundi, “Ghana Economy Profile 2013”, http://www.indexmundi.com/ghana/economy_profile.html, date accessed, 29 March 2014

[3] Michael Kelbaugh, “Debt and Future Generations”, http://www.americanthinker.com/2012/12/debt_and_future_generations.html, 29December 2012, accessed 29 March 2014

[4] Richard Mensah ‘We don’t borrow to buy drinks and food’ – Mahama to critics, http://www.citifmonline.com/?p=8964, 27 March 2014, accessed, 29 March 2014

[5] What is the Third World Debt Crisis? http://newint.org/easier-english/money/debt.html, date accessed, 29 March 2014