Debt-to-GDP not best approach to measure debt levels – Alex Mould


Financial expert and former boss of the Ghana National Petroleum Corporation (GNPC), Alex Mould, has raised concerns about how the country’s debt level is measured as a ratio of the Gross Domestic Product (GDP).

According to him, an effective approach to determine a country’s ability to service debt would be the debt-to-revenue measure.

He was of the view that the government ability to pay back its loans comes only from the government’s Free Cash Flow (FCF).

FCF is explained as revenue less non-discretionary expenses. It represents the amount of cash flow from operations available for distribution after expenses have been accounted for.

He said GDP is not a measure of government’s FCF even though there could be some correlation.

Blomberg last week reported that Ghana’s debt surged to the highest in at least four years as the government tries to plug a budget gap that’s higher than projected.

Total debt was at $38.9 billion at the end of March, up 16% from a year earlier and the highest since March 2015, when the central bank started publishing these numbers in dollars.

As a percentage of gross domestic product, debt rose to 58% in the month compared to 50% a year ago. More than half of that were external loans.

Commenting on the publication by Blomberg Mr Mould said from a cash management perspective, the government needs to focus more on its own revenue with regards to its ability to service debts.

“GDP is not really a good indicator as it includes revenues that do not accrue to the government directly, such as, total cocoa revenue where 60-70% goes to the farmer and total petroleum revenue where only 20% accrues to the government,” he said

The Governor of Bank of Ghana, Ernest Addison, at Monetary Policy Committee press conference last week said the government missed its first-quarter revenue target by almost 20%, resulting in a higher-than-projected budget shortfall.

The nation’s budget deficit target for 2019 is 4.2% of GDP, compared with a shortfall of 3.8% of GDP last year.

Ghana exited a four-year extended credit facility program with the IMF in April this year, pledging to maintain fiscal discipline without the watch-dog role of the Washington-based institution.

The nation raised $3 billion in Eurobonds in March this year.

Mr Mould is not much alarmed with the increasing debt of the country if only they are put to the right use.

“What is relevant is for government to be transparent and prudent on the use of the debt incurred.

“If government is using debt to pay for consumption and not putting the debt into productive use where there will be incremental revenue accruing to the country, thus increasing the GDP which will result also in increased taxes for government that can be used to pay back the loans taken, then this gives us (and the other stakeholders like IMF and WB) some discomfort,” he suggested.

But, where “government behaves arrogantly” and does not believe that we the citizens need to know these things then there is the need for us to rise up and encourage them to do the right things, he said.

Source: Ghana | | GN