IEA proposes 60% debt ceiling to curb borrowing

The Institute of Economic Affairs (IEA) has proposed strict oversight by Parliament over borrowing and debt accumulation in Ghana, calling for a debt ceiling of 60% of Gross Domestic Product (GDP) at any time. The think tank argues that this limit is generally regarded as a sustainable threshold, and that Parliament should only approve borrowing that breaches the debt ceiling during emergencies or crises, while indicating a timeframe to return to the ceiling. The IEA believes that this approach will prevent the recurring debt crises that have plagued Ghana in the past.

The IEA’s proposal is an attempt to force fiscal discipline on economic managers and make it a necessity to operate within borrowing and debt ceilings. The IEA argues that the borrowing and debt ceilings can be incorporated into the Fiscal Responsibility Act, and is seeking constitutional backing for these measures. Drawing on extensive research on debt sustainability, the IEA points out that constant borrowing to finance budget deficits has historically fueled debt, leading to unsustainable levels.

Ghana’s debt has been a source of concern for many years. Prior to 2004, the country’s debt had already reached over 100% of GDP. However, it dropped to 26% in 2006 after receiving the Highly Indebted Poor Country Initiation relief. Since then, the debt has ballooned once again to over 100%, due to persistent fiscal profligacy. This has led to Ghana seeking assistance from the International Monetary Fund and prompted a restructuring of the debt.

The IEA’s proposal is timely, given that the Covid-19 pandemic has resulted in a suspension of the fiscal rule established by the Fiscal Responsibility Act. The Act set a ceiling of 5% for the overall deficit and included an escape clause that allowed the rule to be suspended by the Finance Minister in the event of unexpected shocks. However, the IEA notes that the FRA made the restoration of the ceiling open-ended, contrary to its suggestion that the ceiling should be promptly restored after the amelioration of the shock.

The IEA is therefore seeking the institutionalization of the fiscal rule in the Constitution to safeguard it. The think tank argues that this move will make it more difficult for policymakers to ignore the fiscal discipline required to maintain sustainable debt levels. The IEA’s call for greater fiscal discipline is especially important given the challenges that Ghana faces in the post-pandemic era. The pandemic has led to an increase in debt levels globally, and Ghana cannot afford to take its eye off the ball when it comes to fiscal discipline.

The IEA’s proposal for strict oversight by Parliament over borrowing and debt accumulation in Ghana is a timely and necessary measure. The country’s debt levels have been a source of concern for many years, and the IEA’s proposal for a debt ceiling and strict oversight by Parliament offers a way forward. By incorporating these measures into the Fiscal Responsibility Act and seeking constitutional backing, Ghana can establish a framework for sustained growth and stability that will be crucial in the post-pandemic era. The IEA’s call for greater fiscal discipline is a reminder that even in challenging times, policymakers must remain vigilant in ensuring sustainable debt levels.

Source: norvanreports.com