Government given hints on how to restore investor confidence
Professor Peter Quartey, Director of the University of Ghana’s Institute of Statistical, Social, and Economic Research (ISSER), has advised the government on how to restore investor confidence in the local economy.
He stated that the credit rating agency’s downgrading of Ghana’s economy caused fear in the system.
Also, he observed that speculation as well as a hesitation by investors to acquire bonds, is affecting the cedi’s strength.
Moody’s Investors Service (“Moody’s”) lowered Ghana’s long-term issuer and senior unsecured debt ratings to Caa1 from B3 on Friday, February 4 2022, and revised the outlook from negative to stable.
According to Moody’s, “the downgrade to Caa1 reflected the government’s increasingly onerous task of managing its interwoven liquidity and debt problems. The government’s budget flexibility is limited by low revenue generation, and tight funding conditions on international markets have compelled the government to rely on pricey debt with shorter maturities.
Moody’s estimated that “interest payments would absorb more than half the government’s revenue over the foreseeable future, which is exceptionally high compared to peers at all rating levels. As a remedy, the government has proposed sharp fiscal consolidation and a switch to borrowings from external partners on more favourable terms”.
The policy, however, comes with significant execution difficulties, particularly in the still-fragile post-pandemic climate and when international market debtors price in very wide risk premia. While Ghana’s external buffers and moderate external debt amortization schedule provide the government with a window of opportunity to implement its strategy in the coming years, the balance of payments pressures will increase the longer the government’s large financing needs must be met through domestic sources.
However, Professor Peter Quartey as cited on TV3 on March 7 2022, stated that “Because of our fiscal deficit, revenue challenges and the high debt levels we were downgraded by rating agencies. So that sent some panic to the system and therefore, people started to speculate. When that happens, investors who will bring in the needed foreign currencies to invest, to buy bonds and other things, will hesitate”.
He added that “You will also find that even those that are holding on to our bonds, some might exit. All of that put pressure on the exchange rate. We also have some people out of the uncertainty, who are holding onto the foreign currencies, they might have dollars or Euros but because of the uncertainty, they would hold on rather than trading.
“Exchange rate is determined by demand and supply, so if people are not supplying the foreign currencies but rather there is an increase in our a surge in demand, a surge could also happen when those who hold the local currency don’t have confidence in the cedi and rather exchange the cedi for dollars for keeps.”
“We have all these speculative activities happening and that affect the rate of depreciation. We also know that it has been the tradition that in the first quarter of every year we have this surge in demand for foreign currency because foreign companies will want to repatriate their profits.
“You will also find the Chinese New Year for instance, where a lot of Chinese investors locals will want to go home and celebrate, they demand a lot of foreign currency. So there is a lot of pressure in the first quarter of the year.
“The government revenue doesn’t flow as much as expected, the donor inflow doesn’t come in as expected within the first quarter. Then also, what is happening in Ukraine and Russia is also affecting oil prices, oil prices are going up, so we tend to demand more foreign currency in order to import oil and import other essential commodities,” he added.
Mentioning and suggesting on what should be done to boost the economy and revenue generation, Prof Quartey further explained that “To shore up revenue, I think there are a lot of untapped areas. One has been the issue of property rate and I keep emphasizing this point.
“If you look at the budget statement of 2022, we are earmarking half a billion cedis to be realized from property rates. Just go through the Bank of Ghana records, go through the banks, look at how many people have borrowed and how much the value of collateral they have used in one year, it will amaze you the value of properties that we have in the country.
“Yet, ask yourself what percentage of this property rate that we are realizing? So I believe the low-hanging fruits will be to look at property rate and make sure, we don’t have to increase the rate, whatever rate we have in the system, just apply them and make sure people pay property rate.
“If you tax the rich, that shouldn’t be a problem but where you want to tax the poor that is where it will lead to a lot of agitations. So I think that is one clear area we can raise revenue to bridge the gap and restore confidence in the economy. Investors will have confidence in the economy, rating agencies will have confidence if we are able to raise more revenue”, he concluded
