The Ghana’s Irresistible Borrowings

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Parent Category: Our Country

Category: Business & Finance

Created on Sunday, 30 March 2014 00:00

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The Ghana’s Irresistible Borrowings

Think About It: ‘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: