Reducing debt ACEP advises gov’t against excessive borrowing

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Mohammed Amin Adam, Executive Director ACEP play

Mohammed Amin Adam, Executive Director ACEP

Mohammed Amin Adam, Executive Director of the Africa Centre for Energy Policy (ACEP), has called on government to reduce its debts and use revenue used for interest payments to finance capital expenditure.

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Mohammed Amin Adam, Executive Director of the Africa Centre for Energy Policy (ACEP), has called on government to reduce its debts and use revenue used for interest payments to finance capital expenditure.

Commenting on the recent International Monetary Fund (IMF) bailout arrangements, Dr Adam said the foregoing is preferable to the development of a debt management strategy by the IMF and its approval by Cabinet to guide borrowing.

Explaining further, the ACEP Executive Director stated: “The ceiling imposed on non-concessional debt by the IMF programme is good but unsustainable without a legal effect. To check excessive borrowing, government must further formulate and implement a debt rule based on the solvency ratio or liquidity ratio, two important indicators of debt sustainability.”

He said government must shift from pro-cyclical spending to counter-cyclical spending.

“This requires a strong stabilization mechanism to support the budget during periods of low economic activity.”

Dr Adam added that government must introduce a legal framework on a comprehensive set of fiscal rules – budget balance rules, expenditure growth rules and debt rules and have the discipline to follow the rules.

“Government should fully integrate petroleum revenues into the fiscal policy rather than its current structure as earmarked funds for selected sectors and for financing the Ghana Infrastructure Investment Fund (GIIF).

“Given that government short to medium term target is to have a primary surplus of 0.9 percent of GDP in 2015 and 3.2 percent of GDP in 2017, a fiscal rule that requires non-oil primary balance deficit at 1 percent of trend GDP is appropriate. Where there are surpluses, they can be saved to build government assets. This removes the pro-cyclicality in the fiscal policy and ensures accelerated accumulation of government assets.”

A strong proposal for setting the Ghana Stabilisation Fund (GSF) cap is to put it at not less than 50% of ABFA or an alternative proportion of GDP. This rule ensures that in the event of a shortfall in petroleum revenue by 20% to 40% of ABFA, there will be sufficient reserves to finance it and restore budget balance.

However, fiscal consolidation remains a difficult target with the largely administrative measures. It requires strong rules enshrined in law to ensure both fiscal credibility and consolidation and to help address the often too much fiscal discretion that often pushes fiscal policy making to the gallery. The rules should be a combination of budget balance rules, expenditure rules and debt rules, he indicated.

He said the focus on future oil and gas revenue and grants for achieving fiscal consolidation was also worrying.

“Revenues from these sources are volatile and uncertain. A stronger rebound in oil prices over the medium term remains highly uncertain considering that global demand for oil is not rising as fast as anticipated.”

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Credit: Daily Guide

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