Development Financing in Africa: Is Ghana on the Path to HIPC?

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Date

2017-04-27

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University of Ghana

Abstract

Development financing encompasses all financial flows aside funds from the domestic private sector which are usually received from internal or external sources. These flows to developing countries usually take the form of (i) Government revenues (ii) Concessional development assistance (i.e. external grants and concessional credits) (ii) Non-concessional loans taken out by (or guaranteed by) developing country governments, usually from International Financial Institutions (IFIs) or private sources or commercial loans such as Eurobonds, typically used for infrastructure development or other revenue generating projects; and (iv) Private external finance, in the form of Foreign Direct Investment (FDI), portfolio flows, and remittances. Private external finance funds are mostly targeted at engaging in direct production or provision of services with focus on growth objectives rather than social objectives. Development financing across Sub-Saharan Africa (SSA) has undergone a number of transformations over the past two decades with a major shift in recent times from concessional financing, especially in middle-income countries to non-concessional financing and other new methods of financing growth. For instance, private capital flows, mainly in the form of FDI, and remittances have now overtaken official development assistance (ODA), while China and the other non-DAC Donors have increased their presence within the continent. Another notable development in low middle income countries is the increased resort to the capital markets especially Sovereign Bonds. Although the UN (2005) argued that private capital flows will contribute significantly to development, the reality has been less than desired. In order to augment the existing financing mechanism, there has been a proposal from the UN High Level Panel on Financing Development chaired by the former President of Mexico, to consider innovative sources of finance such as currency transaction tax, carbon tax, international air transport tax, new issuance of Special Drawing Rights (SDRs) etc. Despite these dynamics in the development finance architecture, there remain significant resource gaps between inflows and public investment requirements within SSA. Investment requirements were in the range of 15% of GDP in 2000 to 20.3% of GDP in 2015, while savings as a percentage of GDP was about 20% in 2000 and by 2015, it had declined to 13.8% of GDP, indicating a gap of about 7% of GDP to be filled in the midst of declining concessional finance. Interestingly, in lower-middle-income countries, on average, savings as a proportion of GDP has hovered around 27-32% and has consistently been above investment. However, this cannot be said about Ghana, though it is also a lower middle-income country. One may then ask, how has Ghana financed its development expenditures in the midst of the changing dynamics within the new financing architecture? Is this trend gradually driving the country’s debt sustainability thresholds to HIPC levels? In this lecture, I review the development finance architecture across SSA and critically analyze the specific case of Ghana. I particularly examine the savings investment gap and how it has been financed through Taxes, Aid, FDI, and other forms of development finance. I then analyze the trends in debt as a result of the country’s reliance on external assistance and ascertain whether the country’s debt ratios are gradually cruising to HIPC threshold

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Keywords

Development, Financing, HIPC, Ghana, Africa

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