Secretary to the Treasury, Keith Muhakanizi has expressed concern over the proposed $8.5bn Ug intends to borrow from Chinas Exim Bank to finance the Standard Gauge Railway project. If this borowing goes ahaead, our public debt will exceed half of the our GDP-- a threshold which should not be passed for better economic governance. Ugandas public debt (domestic and external) stands at about $10bn while our GDP is $24 billion after the economy was rebased last month. The effect on Ugandas economy debt sustainability of contracting the entire $6.69bn immediately is Ugandas debt to GDP ratio will rise 84.1% much higher than the prudent level of 50%, Muhakanizi said. This got me thinking of a discussion i had with a Ghanian friend on the state of their economy. Ghanas story almost brought tears to my eyes! The wheels are coming off Ghana’s economic miracle. The cedi has fallen 40 per cent this year. Interest rates have gone through the roof. Inflation is at 15 per cent and rising. Landlords are demanding rent in dollars. Last month Ghana applied for IMF assistance to deal with its macroeconomic crisis. Ghana is one of the brightest stars of the “Africa Rising” story. Ghana has sustained economic growth over six per cent for more than a decade, propelling it to attain the coveted middle income status. Oil was discovered in 2007 and came on stream in 2010 adding to gold, of which Ghana is Africa’s largest exporter. Ghana is also the world’s second largest exporter of cocoa after neighbouring Cote d’Ivoire. Unsurprisingly, Ghana led Africa in tapping the international capital markets issued first Eurobond in 2007 and a second one last year. Ghana’s oil production started in 2010, and is running at about 80,000 barrels a day. Ghana’s trade balance has worsened. The current account deficit (the difference between foreign exchange earnings and expenditure) has risen from an average of eight per cent of GDP before it started exporting oil to 9 per cent in 2011, 12 per cent in 2012 and 13 per cent last year. In addition to two Eurobonds totalling $1.5 billion, Ghana took a highly controversial US$ 3 billion loan from the China Development Bank, secured on oil. Between these and other borrowings, Ghana has managed to double her foreign debt in three years!! Can Uganada go the same way?? Ive tried to look at our budget deficit over the last decade or so.The government reports the figures on a discrete fiscal year basis as opposed to a continuous month-on month basis. It does not require a whole lot of economic expertise to see that these trends are unsustainable. We are, without doubt, hurtling towards a macroeconomic crunch!! How will Ug pay back these huge debts, you wonder??The normal way that government’s finance this is by refinancing, which is fig leaf lingo for borrowing to pay. We need to pray that the financial markets will still have an appetite for African sovereign debt. We already know that Uganda plans to launch a debut Eurobond issue($1bn) to fund infrastructure spending. Ghana is not alone in dampening the enthusiasm for African sovereign Eurobonds. Macroeconomic distress is also stalking Zambia. After the record subscription of Zambia’s debut bond, yields have risen steadily, losing the initial subscribers a fair amount of money (a rise in bond yields has the same effect as a fall in the price of a share). It is not inconceivable that the appetite for African sovereign bond issues will wane as more African countries, us included, abuse their newly found financial freedom. Whatever the case, we cannot afford to continue on the fiscal path that we are on. It is reckless. The madness has to stop. And if we don’t do it ourselves, the iron laws of economics will do it for us—and that, take it from me, does not come cheap!!
Posted on: Fri, 05 Dec 2014 10:51:28 +0000
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