After the IMF released Ghana’s debt-to-GDP figures around April 2016, which showed the ratio to be about 74%. This ratio, which measures the amount of money a government has borrowed from both international and domestic sources as a percentage of GDP, is perhaps one of the most cited metrics on a country’s economy.

The debt-to-GDP ratio is a measure of a country’s debt compared to its economic output. Some politicians, media analysts as well as some economists, who dominate the airwaves sometimes, become obsessed with this particular debt-to-GDP ratio. What’s more, because the ratio is being promoted by the IMF (the Apostles of Austerity), most people do not question such a concept and accept it as wholly true. Our work today is to explain the meaning of this debt-to-GPD ratio and its inherent flaws, and then criticize it as a misleading and to some extent meaningless ratio in calculating a country’s debt sustainability.

The debt-to-GDP ratio is the total debt obligation a country has accumulated in relation to GDP. Put differently, the ratio compares what the country owes to what it produces or earns as income. The essence of this metric is to ascertain a country’s ability to pay back or service its debts. The ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment. In other words, it is generally viewed as a sign of whether or not a country’s finances are sound, or whether its debt burden is reaching dangerous levels. Thus, when the debt-to-GDP ratio is increasing over time, it suggests that a country is becoming less fiscally sustainable, while a decreasing ratio implies it is fiscally sustainable. Consequently, the higher the debt-to-GDP ratio, the less likely a country will be able to pay its debt, and therefore, the higher its risk of default. Even though economists have not set a specific ratio, the lower the ratio below 50%, the healthier the country’s fiscal outlook, and therefore the better. Thus, the 74% IMF published last week for Ghana, suggests that the country will not be able to service its debt, and therefore has a high probability of default; a situation which some politicians have already described as HIPC.

To put this discussion in a proper perspective, we would like to focus on Ghana and analyse the extent to which this 74% debt-to-GDP ratio is a concern. First, we need to understand that there are two types of debt that the Ghana government owes namely; domestic cedi debt and external or foreign currency denominated debt. These two sources of debt have completely different characteristics, and as such adding them together to obtain single ratio of 74% debt-to-GDP, to measure the country’s ability to pay its debt, and its probability of default, is perhaps, misleading.

Mr Seth Terkper signing IMF agreement

Second, we would like to highlight the two key concepts of currency issuer and currency user. The government of Ghana is the cedi currency issuer or the sole issuer of domestic currency, the cedi. However, when it comes to foreign currency, say the dollar, the government becomes the user of the dollar. As a foreign currency user, the government of Ghana does not issue any of those currencies, and therefore, for example, it has to earn enough dollars to pay off its dollar debt. Anytime the government borrows foreign money more excessively than it earns in foreign currency, it may not be able to repay the loan, and default could ensue.

On the other hand, the Ghana government which is the issuer of the cedi, can issue an unlimited amount and cannot run out of the cedi. Therefore, the domestic debt is not a debt on which the government will default, and it can always pay this debt even if it reaches 200%. One may confirm this from the developed countries with huge domestic debt-to-GDP ratios like America (105%) and Japan (229%), but the likelihood of default is virtually non-existent. That is because these debts, which are issued in their own currencies are purely domestic Treasury securities with low interest rates. They can simply issue more dollars or more yen to pay off the debt, and therefore, are not in any danger of a default.  However, the world’s developing countries which are actually among those with the lowest debt-to-GDP ratios, unfortunately, have a higher risk of default, because most of them have more external foreign currency debt than their domestic Treasury debt. Ghana, for example, recorded a domestic debt ratio of around 30% and foreign debt ratio of about 44% in 2015. The point is that no sovereign country will default on its own currency debt that they issue. Consequently, adding domestic debt to foreign debt to obtain one ratio overstates the debt ratio problem, and is misleading and deceitful, and therefore, meaningless.

The foreign currency denominated debt is issued in foreign currencies other than the Ghanaian cedi, that is, Ghana debts owed to foreign entities. A couple of weeks ago, there was a huge controversy between Nana Akuffo Addo of the NPP and President Mahama of NDC, on the amount of Ghana’s debt. Our little comment on this is that every foreign debt is covered with an agreement or term sheet which clearly spells out the amount borrowed, the currency in which the debt is issued, the interest or coupon rate and the maturity period, as well as the fees charged for that transaction. Thus, this should not have generated such a huge controversy because if all these information were available, any student in our fund management class could calculate how much Ghana owes, and thereby, avoid any such confusion.

It is estimated that as of June 2015, Ghana had borrowed about $13,552.6 million from external sources, (source 9/2015: Ministry of finance press release on Ghana’s debt) representing about 44% of GDP. Since the government of Ghana has no control in the issue of these foreign currencies, we agree that borrowing too much from external sources could be unsustainable if the country has a perpetual current account deficit position. In other words, Ghana’s ability to service or repay its foreign debt in a foreign currency when export receipts are low may be a concern, and the potential for default exist. The practice of reissuing of new foreign debt (eg the Eurobonds) to pay off old debt is a very expensive one and just a joke. With this background, if Ghana’s external debt level reaches a certain threshold, the international financial community, (usually led by the IMF, World Bank and Credit Rating agencies) with their international standard norms may be justified in downgrading Ghana’s credit worthiness.

On the other hand, the domestic debt stock is the net outstanding of all Treasury securities; that is, Treasury bills, Treasury notes and Treasury bonds, issued in cedis by the Ghana government during the past 29 years, since Treasury operations started in 1987. It is also important to note that we are only talking about domestic borrowing in the form of Treasury securities (Treasury bills, Treasury notes and Treasury bonds) as distinct from payables, commitments or arrears the government has to make to settle contractors and other emoluments, etc. In June 2015 this domestic Treasury debt was estimated to be about Ghc39.6 billion.

In fact, we cannot find any good convincing argument on why we apply this ratio when considering a country’s domestic debt situation. Hence, applying the debt-to-GDP ratio to measure Ghana’s domestic debt sustainability and probability of default is wrong. We can understand that when an individual borrows three times more than their income, they can feel some financial stress with regards to the repayments, which can possibly result in a default. This is because their income or revenue to debt cannot support those repayments. Some economists have tried to apply this concept to government domestic debt. However, applying this analogy to domestic debt is not accurate, because the government does not run its finances like an individual or a business entity.

The government of Ghana is the sole issuer of the cedis, and can issue any quantity of the cedis to pay for its domestic debts and therefore, cannot default. As long as domestic debt (Treasury securities) are issued in Ghana’s cedis, the government can pay off these debts at any time, no matter how much it owes. Thus, whenever the debt matures, it can simply reissue new ones to replace the old ones. The government spends in cedis and those cedis flow to people and firms who then swap them for Treasury securities so as to earn an interest. When the time comes to pay the people back at maturity, the government simply takes the Treasury securities back and issues cedis to the holders once again. The government has never had a problem performing this operation and has never been unable to do this. Practically, for the past 29 years, this is how the operation has been structured and there has been no sign or history of government defaulting on its Treasury securities or domestic debt. To repeat, there is no way the government will run out of cedis to pay for its cedi debt and therefore, can never become insolvent or go bankrupt, and default on its domestic debt. In fact, stated differently and more strongly, Ghana has “no domestic debt” as long as the debt is issued in cedis.

It therefore, also follows, that the government should not be dependent on tax revenue or borrowing (domestic or foreign) to take on the spending and investment it needs to make. It is common to hear some politicians say that the government must “save money”. One does not need to save what they can create without limits. Vodaphone, MTN and AirTel can issue an unlimited amount of airtime and cannot run short of credits for airtime. These companies are the sole issuers of airtime and they neither need to borrow credits nor tax users for credits. In that same way, the Ghana government which issues the cedi can never run short and can issue unlimited amounts. It does not need to borrow or tax its people before it can spend its own cedis. Hence, the domestic debt ratio can reach 200% and over, as long as we can manage inflation. Inflation can also be managed as long as there are idle resources and the economy is not close to full employment. Ghana would not default on its Treasury securities and cannot be forced into bankruptcy so far as the securities are issued in cedis.

Furthermore, those who believe in the domestic debt-to-GDP ratio think it measures government’s ability to pay its cedi bills. However, the government does not pay its cedi debts with GDP; it creates the cedi any time it needs to pay its debts. A country does not default on its domestic debt if it cannot lower the debt to zero, but it defaults if it cannot meet its periodic payment. In other words, there is absolutely no logical reason why we must work to lower domestic debt to zero. The Bank of Ghana has designed the Treasury operation and reserve accounting in such a way that the government should be able to pay those Treasury bills whenever they mature without any problem.

For policy direction, let’s assume the government wants to use its monetary tools in the following manner, where it decides to issue more cedis during recessions and issue more Treasury securities during booms, then the domestic debt-to-GDP ratio could easily fall to zero during recessions even when GDP is falling. Assuming GDP were to be Ghc0 (in other words, GDP is low or declining), the government could still pay cedi bills of any size, simply by crediting the bank accounts of its creditors. This explains the reason why we don’t see any significance of this ratio as far as domestic debt is concerned.

Another problem with the ratio is that when the ratio goes up, people assume this is because of high domestic borrowing. However, when it goes up in most cases, it is because of a recession or an austerity programme that has shrunk the size of the economy (GDP), which is the denominator. In Ghana’s case, the GDP figures has been shrinking since 2011, falling from 14% to 4% in 2015. Thus, because the denominator (GDP) has shrunk, the ratio will definitely go up, and yet there is no sign that the government is unable to pay its domestic debt or any likelihood of default. Ghana lost a huge chunk of GDP from 14% to 4% probably because the government has been pursuing an austerity program over these years. Such a policy tends to have a double negative effect on the ratio because when the economy goes into a recession, it magnifies the ratio; and if the economy doesn’t recover, it reduces the denominator by a big chunk, causing the ratio to balloon even further.

Tema Harbour

In calculating the domestic debt-to-GDP ratio, the ratio takes the total accumulated domestic debt stock as the numerator (figure on top) and GDP as the denominator (figure below). GDP is a flow variable (per unit of time), measuring economic activity within a particular period, usually annually. In our elementary mathematics we learnt that anytime we are dividing, we should make sure that the numerator and the denominator have the same unit. However, these two pieces of data are not compatible, because GDP is a one-year flow measure of output, whereas government domestic debt is a stock of the net outstanding of all Ghana’s Treasury securities created since the introduction of Treasury securities in 1987. Thus, the T-securities created 29 years ago affect this year’s (2016) debt in the debt-to-GDP ratio calculation, whilst even last year’s (2015) GDP has no impact, whatsoever, on this ratio. Why do we compute a ratio of cumulated debt stock to an income flow within a circumscribed period of time? What is so special about government paying all the accumulated debts fully in one year and so one may ask, what is the purpose of having debt maturity periods?  The ratio would be four times higher than it is reported if we should annualize quarterly GDP data and multiply quarterly GDP by four. On the other hand, we should expect the ratio to be lower if we should apply 10years (or decadalized) GDP by multiplying the quarterly GDP numbers by 40 instead of four (or the annualized GDP figures). Since we know that, on the average government debts matures in 3years why not use 3years GDP? I guess such an approach will be fair to countries, will not create panic for investors as well. Moreover, considering the debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) is just like comparing apples and oranges. Since economists pay attention to units of measurement, a ratio that compares or measures stocks and flows raises standardization concerns.

By now everybody knows our position that the government cannot depend on taxes to finance its operations. In other words, taxes are not meant to pay for government debts. The ultimate purpose of taxation and borrowing is not to raise revenue for government to spend and pay debts. Instead, taxation should be used to reduce aggregate demand, by taking away excess money from the economy or simply to reduce total spending power, so as to “leave room” for the government to spend.

Now supposing for the purposes of this argument, we take a detour to mainstream thinking, where they assume that the domestic debt has to be serviced by an income or revenue. Then, the taxes which form government revenue, should be used to service the domestic debt and not GDP. In order words, the accurate formula should be debt-to-tax because the domestic debt should be serviced with taxes but not GDP. The ability to repay debt from this argument is based on tax revenues, not on the GDP. Our domestic debt to government tax revenue would be more similar to a family’s comparison of its debt to income. This makes the expression of debt in terms of GDP inaccurate. Furthermore, the government cannot claim the entire economy’s activity (GDP) to service its debt, as it is entitled to only a portion of it, the tax revenue component. This is an important distinction to make because it is misleading for the government to claim and apply the entire national income (GDP) to its debts. In short, we are measuring Ghana’s sovereign domestic debt sustainability with an arguably deceitful statistic.

The national income also called GDP has three components parts, that is, the government sector, the private sector and the external sector.

Thus, GDP = (Government Spending-Taxes)+ (Saving-Investment)+(Exports-Imports). 

(G – T) +(S – I) +  (X – M) = 0,


(G – T) = public sector balance


(S – I) = private sector balance


(X – M) = foreign sector balance


The government does not have access to all the national income or GDP, but only the share it collects in taxes. Comparing the domestic debt level to GDP is like a person comparing the amount of their personal debt in relation to the value of the goods or services that they produce for their employer in a given year. Clearly, this is not the way one would establish their own personal budget, nor is it the way that the government should evaluate its fiscal operations. Yet this absurdity is propagated when we use the government debt-to-GDP ratio as our gauge of solvency. Now assume, every Ghanaian (the private sector) went out and bought a car this year, then GDP would shoot up because consumption would increase, and suddenly the Government’s debt ratio would fall. Thus, what this ratio does tell us is that debt burdens are reduced as long as GDP figures go up. Analyzing debt burden based on how much the nation consumes or the extent of the nation’s volume of transactions does that make any sense?

Consequently, from the mainstream thinking, a better comparison should be debt-to-tax revenue, which is also more accurately calculated. If the Government owes say, Ghc1 billion (wouldn’t that be nice?) and takes in half a billion in tax revenue, then the debt-to-tax revenue ratio would be 2:1, or 200%. Thus, using all tax revenue to service the debt, it could be paid within two years (if, of course, all other government services were canceled for those two years). Since Ghana’s tax revenue mobilization is not enough and therefore, cannot fund all government activities, computing a domestic debt-to-tax revenue ratio is even more “frightening”. From our research, domestic debt-to-tax revenue was 87% in 2013, 104% in 2014, and 67% in 2015. Nevertheless, Ghana has not gone bankrupt on its domestic debt.

Ghana Stock Exchange

Therefore, probably, a good ratio would be the ratio of interest payments on domestic debt to the national budget, because there is a level of debt beyond which interest payments will consume the entire budget. This is however, an interest rate issue and a separate matter. The government cannot borrow its own money through Treasury securities at such a ridiculously high interest rate.

Thus, this debt-to-GDP metric is one of those austerity tools developed by the apostles of austerity to impose unnecessary austerity and hardship on economies. The austerity apostles will prescribe to countries to run a primary fiscal surplus in a recession, but following such a program will make the recession even worse, raising the debt-to-GDP ratio and increasing the risk of sovereign default. Running a primary fiscal surplus when growth is poor and the private sector is highly indebted is likely to cause a recession and may lead to financial crisis. Therefore running a sustained absolute surplus robs the private sector of its savings. We believe that it is time to reassess this orthodox debt-to-GDP ratio, and help prevent the untold suffering that it normally brings on countries, and thereby individuals.


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