Rising external debt stimulates demand for foreign exchange and cedi depreciation

Auditing and management firm Deloitte Ghana warns that the country’s rising external debt will lead to increased demand for foreign exchange for debt repayment and further depreciation of the cedi.

It may also cause additional pressure on government finances as it will need to raise more cedi revenue to repay external debt.

In his criticism of the 2022 mid-year budget review, he said the downgrade of Ghana’s credit rating by Fitch and Moody’s had hurt the government, with Ghanaian Eurobonds currently trading at debt levels in difficulty, which has led to an increase and prohibitive cost of borrowing in Eurobonds.

“A comprehensive debt management strategy, focusing on access to concessional lending facilities and reducing our dependence on commercial loans, should be pursued by the government,” he stressed.

Data from the Bank of Ghana puts Ghana’s debt at 393.4 billion yen, or about 78.3% of gross domestic product at the end of June 2022.

Of this amount, ¢203.4 billion ($28.1 billion) is external debt.

Total debt issuance by the government increased by 17.6%, from June 2021 to June 2022, compared to a 29.5% increase in total debt issuance from June 2020 to June 2021. This increase in l Debt issuance, combined with high global inflation in 2022, has led to increased borrowing costs for the government, both domestically and in international markets.

In international markets, issuing debt securities and paying interest have become more expensive due to investor concerns about the government’s fiscal position and the depreciation of the Ghanaian cedi against foreign currencies. Therefore, the government was unable to issue sovereign bonds in 2022 due to these unfavorable market conditions.

Rising domestic debt is crowding out the private sector

Deloitte said the increase in domestic debt issuance highlights the existing competition between government and companies for funds available in the domestic market.

“Given the lower risks of lending to government compared to the private sector, this has resulted in an increase in lending to government since the start of 2022 at the expense of the private sector. This “crowding out” of funds available to the private sector results in higher borrowing costs for private sector companies due to their higher risk of default, which ultimately also increases the likelihood that companies private companies do not repay their medium and long-term loans,” he pointed out.

“The government should focus on controlling inflation and stabilizing the exchange rate to help reduce default risks in the private sector and induce commercial banks to increase lending to the private sector,” he said. He underlines.

Revised interest expense due to cedi depreciation

He also said that the revised interest expense of ¢41,632 million in 2022 (30% of total 2022 expense) is due to the depreciation of the cedi against foreign currencies and the increase in interest rates. due to rising global inflation.

Further depreciation against foreign currencies, he said, could lead to higher interest expenditure on external debt and a subsequent rise in the budget deficit.