The full scale of the devastation caused by the COVID-19 pandemic is only now becoming clear as the Finance Minister, Ken Ofori-Atta, revealed that the fiscal deficit for the first half of 2020 had risen to GH¢24 billion (6.3% of GDP). The fiscal deficit is the difference between government’s revenues and expenditure over a specific period of time. The GH¢24 billion shortfall is three times the deficit over the same period last year and more than double the GH¢11.7 billion that was projected at the start of the year.

Presenting the mid-year budget statement to parliament today, the minister also revealed that tax revenue for January to June 2020 was GH¢22 billion, 26% below the projected for the period. For comparison, the difference between the projected tax revenue in 2019 and the actual out-turn was only 9.4%. For the non-grant revenue, oil revenues suffered the sharpest deviation with the out-turn of GH¢2 billion being 55% below target. Expenditure for the first half of 2020 rose to GH¢46 billion, 11.5% more than budgeted for the period.

When government’s revenue exceeds expenditure, the difference is made up from borrowing which increases the public debt. About 90% of the GH¢24 million deficit was financed from domestic borrowing. The total public debt as at June 2020 stood at GH¢258 billion (67% of GDP). External debt continues the worrying trend of being the larger component (52.7%) of the public debt.

Beyond the fiscal impact, the projected economic growth for 2020 has been revised downwards from 6.8% to 0.9%. The tourism industry has been the hardest hit, with 979 accommodation facilities having shut down. That is about a quarter of all such facilities in the country.

The fiscal impact, in my opinion, is going to be the most lasting economic impact of the pandemic because the impact on government’s debt sustainability is not going to disappear after the pandemic is gone. The projected fiscal deficit of 11.4% of GDP at the end of 2020 would be the largest since 2012. Keep in mind that this deficit will have to be funded from further borrowing and that the larger component of Ghana’s debt is external.

Now, I’m far from the biggest fiscal hawk or debt alarmist but the fiscal and monetary tools available to developing countries with huge external debts are very limited. The year 2013 is an example of how quickly things can get desperate when government’s lenders get nervous.

Yet still, the debt management section of the mid-year budget statement still proposed increased borrowing on the international capital markets, non-concessional borrowing for priority projects and an upward revision of the $750 million cap on non-concessional borrowing. This is despite the fact that the minister admits that our debt sustainability is under serious threat. In 2019, the Debt Sustainability Analysis (DSA) showed that Ghana’s debt distress was high. And for 2020, I will quote directly from the budget statement.

The shocks from COVID-19 pandemic (fall in crude oil prices and decline in trade) are expected to deepen the current account and fiscal deficits over the medium-term, resulting in an elevated debt path compared to the pre-COVID-19 2020 DSA.

2020 Mid-Year Budget Statement. pg 25

As an investor, I am worried about the potential impact of debt distress. The stock market has been terrible and fixed income has been the driver of returns for many funds. Any indication that government’s ability to keep refinancing its debt might be in trouble could lead to selling on a massive scale, driving government’s borrowing costs through the roof.

Given the situation, it should not be surprising if whichever government emerges from the elections in December decides to seek IMF help in returning to the path of debt sustainability. After all, the presence of COVID-19 would be a perfect foil for the political attacks that comes with IMF programmes. It would probably do the country a lot of good if efforts are made to signal that the government cares about debt sustainability, otherwise the economy may not benefit from the normalization of economic activity after the pandemic has passed.