Eurobonds are contributing to the cedi’s depreciation, Databank reveals

Databank’s research has shown that the over-reliance of foreign currency denominated debt such as Eurobonds by the government of Ghana is a contributive factor of the constant fall of the cedi against major foreign currencies.

Finance Minister, Ken Ofori-Atta

“The 2019 Eurobond pushed up the share of foreign currency debt, raising the vulnerability to exchange rate shocks,” the findings revealed.

With low foreign investor appetite for cedi-denominated bonds, which is a result of government’s heavy reliance on dollar-denominated bonds and the sharp depreciation of the cedi during the first quarter of 2019, the share of foreign currency debt now constitutes 53% of the country’s total debt.

An economist and analyst with Databank, Courage Martey, explained that with the increased share of the dollar debt, a sharp depreciation of the local currency will cause a steep increase in the public debt portfolio.

“The growth in Ghana’s total public debt tends to mirror growth in the country’s external debt, which reflects exchange rate performance. Overall, we view the higher foreign currency obligation as a potential conduit for exchange rate shocks, while persistent revenue shortfalls also raise the public sector borrowing requirement as expenditure commitments remain rigid,” he said.

Ghana’s total public debt increased steeply by GH¢24.8billion in the first quarter of 2019 to GH¢198 billion or 57.5% of projected GDP, including the additional financial cost of GH¢1.2 billion emanating from the financial sector reforms in 2018.

The 2019 budget projected a deficit of GH¢14.54 billion representing 4.2% of GDP, excluding fiscal costs associated with the Non-Bank Financial Institutions Sector reforms.

The deficit will be funded from domestic borrowing of GH¢4.78billion and external borrowing of GH¢9.75 billion.

In relation to this, the report said although domestic revenue performance tends to improve in the second half of the year, the persistent shortfall in full-year outturn (since 2016) remains a major threat to fiscal and debt sustainability.

It further said the 2019 revenue outlook hinges on strict enforcement of tax compliance, reducing the size of revenue lost to tax exemptions, which is about 1.6% of GDP; port digitisation and reforms; and broadening the tax base beyond the current 25% coverage for direct taxes, amongst others.

“While we expect collections from direct taxes to improve over the course of the year, we remain cautious about revenue from international trade taxes,” the report noted.


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