Between January 1 and September 19, government domestic borrowing, through the sale of short-dated instruments, amounted to GH¢26.18 billion, up from the GH¢19.03 billion it borrowed within the same period last year.
A Graphic Business analysis further reveals that the government borrowing was 37.57 per cent more than the previous period, in spite of the substantial rise in the interest rate at which the funds were borrowed.
The amount accrued from the weekly auctions of the 91-day and 182-day Treasury Bills and the one and two-year notes, through weekly tenders at the Bank of Ghana (BoG).
The interest rate on the 91-day T-Bill quoted at 19 per cent on January 4 and fluctuated along. As of September 22, the bill was quoted at 25.4 per cent, while that of the 182-day T’Bill was pegged at 24 per cent, data from the BoG showed.
The increment in government’s domestic borrowing largely explains why the general lending by banks slowed down by 10 per cent on the average for last year, while their holdings in these securities rose by 43 per cent as captured in the 2013 Banking Survey report by accounting and auditing firm, PwC.
A banking consultant, Nana Otuo Acheampong, told Graphic Business in an interview that the development was disingenuous to the economy, given that it was dominated by micro, small and medium scale enterprises (MSMEs), which need extra capital to grow into giant companies.
The marked increment in government borrowing from the money market was a sign of credit challenges facing businesses, he said, citing the cost at which banks lend to businesses and the general public.
He explained that once banks realise that investing in short-dated securities would give them good returns compared to lending to businesses, which came at a risk, they would channel a large chunk of their lendable funds into these instruments as against giving them to businesses. This is usually termed, crowding out the private sector.
Two industry experts, Mr Mahama Iddrisu, a stock analyst and Managing Director of EDC Stockbrokers Limited, and Dr John Gatsi, a chartered economist and Lecturer at the University of Cape Coast (UCC), said in separate interviews that the government’s increased borrowing through the T-Bills was fuelled by a corresponding rise in its thirst for funds to finance capital projects as well as pay for maturing debts.
“If government borrowings from the sale of these instruments are going up, then what it means is that government’s need for funds to support capital projects is increasing and that could be because budgetary allocations are sufficiently unavailable,” Mr Iddrisu explained.
Majority of the accrued funds, he said, were used as counterpart funding to donor-sponsored projects as well as paying contractors.
Dr Gatsi also explained that the situation was compounded by the short-term nature of the securities which forced the government to auction new securities to redeem the maturing ones.
“If you borrow T-Bills for, let’s say, three months, after three months, you have to repay but what would you have done to generate revenue with which you can use to repay? You would not have done much and so you would have to go in and borrow more through the same T-Bills so you could repay and that is the cycle we have been going through,” he added.
Falling revenues, rising T-Bill rates
All the government’s revenue generation streams have, for the past few quarters, experienced shortfalls.
This is in the midst of rising expenditures, which, cumulatively, lead to gaping budget deficits over the periods.
For instance, total revenues and grants for the first half of the year was reported at GH¢13.3 billion against a budget target of GH¢14 billion. Total expenditures, on the other hand, totalled GH¢19.3 billion, the Bank of Ghana (BoG) said in its September 2014 Monetary Policy Committee (MPC) report.
Consequently, the deficit to total productivity (GDP) was estimated at 5.3 per cent, also above a budget target of 5.1 per cent.
To help plug that revenue loophole, fund infrastructural developments and meet other pressing needs, the government stepped up the sale of the short-dated instruments through the BoG to borrow from the general public and later repay with interest when the instruments mature, mostly between 90 days and two years.
This development, however, pushed the rates at which these instruments were redeemed to record levels in a spate of nine months, beginning from January this year.
For instance, while yields on the 91-day bill rose by 32.19 per cent between January 6 and September 15, yields on the 182-day bill also experienced a 37.43 per cent rise between the same period, from 19.18 per cent interest rate to 26.36 per cent.
That of the one and two-year notes also went up, the one-year note moving from 17 per cent in January to 25.5 per cent in September 15 this year.
These developments were a reflection of the dire nature of government’s quest for funds, Mr Iddrisu of EDC said.
“It is true that government is the one auctioning these securities but it is not the one with the funds; individuals and investors do and for government to get them to lend to it, it needs to bid higher, more like entice them else they will push their funds into other investment mechanisms,” he said, mentioning microfinance companies as one place that could guarantee higher return for deposits.
Implication on businesses
Nana Acheampong, who is the Executive Director of the Otumfuo Osei Tutu II Centre for Executive Education and Research (OTCEER) in Kumasi, explained further that a consistent rise in the yields of T-Bills meant that the cost of money was becoming dearer to businesses.
“When I talk of cost of money, I mean the use of money both as a saver and borrower. So, for the businessman who has excess cash to save, it means they will get more interest on their savings. However, for the businessmen who are in cash deficit and, therefore, have to borrow from the financial institutions, it means they will pay more for that cash and that is not good for their operations,” he said.
The three analysts concurred that the government needed to reduce its short-term borrowing to help free cash for businesses as well as reduce the cost of credit in the country.
This, they said, could be done through a switch from short-term instruments to long-term ones such as the Eurobond as well as five, seven and 10-year bonds, which would give government the needed space to invest the borrowed funds in projects that were self-financing.
“If the Ghana Infrastructure Investment Fund (GIFF), as talked about by government, is also properly structured and resourced, it can help reduce demand for these securities and all that will inure to the benefit of businesses,” Mr Iddrisu said.
Credit: Graphic business