Risks Loom Over Mahama’s Proposed Public Debt Ceiling for Ghana

John Mahama’s proposal to establish a public debt ceiling of 60-70% of Gross Domestic Product (GDP) has provoked a notable debate regarding its potential risks to the country’s economy.
While the intention behind this measure is to curb excessive borrowing and promote fiscal sustainability, experts warn that it could limit the government’s ability to finance essential services and infrastructure projects. As the country struggles with high inflation and rising unemployment, the implications of such a rigid fiscal framework could increase existing economic challenges.
One of the primary concerns surrounding Mahama’s debt ceiling proposal is the potential reduction in fiscal flexibility. By imposing a cap on public debt, the government may find itself constrained in responding to urgent economic needs or unforeseen crises.
This limitation could hinder investment in critical sectors such as health, education, and infrastructure, which are essential for stimulating economic growth and improving living standards. The risk is that essential spending might be curtailed precisely when it is needed most.
Additionally, the proposal could lead to higher borrowing costs for the government. Investors often view debt ceilings as indicators of fiscal distress, which can result in increased interest rates on government bonds. This scenario creates a vicious cycle: elevated borrowing costs strain public finances further, making it more challenging for the government to meet its obligations. The recent history of domestic debt exchange program illustrates how rising interest rates can erode investor confidence and escalate costs for local businesses.
Mahama’s plan also raises questions about the feasibility of balancing fiscal discipline with expansionary policies, particularly regarding potential negotiations with the International Monetary Fund (IMF). While securing additional funding from the IMF could provide temporary relief, it may come with stringent conditions that limit government spending in other critical areas. Past experiences with IMF programs have shown that such measures can lead to social unrest if citizens perceive austerity measures as detrimental to their daily lives.
Moreover, there is a risk that Mahama’s debt ceiling could crowd out private investment. If government borrowing is restricted, access to credit may diminish for private sector entities, particularly small and medium-sized enterprises (SMEs) that rely on affordable financing to grow and create jobs. This lack of private sector dynamism could stifle economic innovation and growth, further entrenching stagnation in an already fragile economy.
While John Mahama’s proposed public debt ceiling aims to promote fiscal responsibility and sustainability, it carries significant risks that could undermine Ghana’s recovery efforts. The potential for reduced fiscal flexibility, increased borrowing costs, challenges in negotiating with the IMF, and crowding out private investment highlight the complexities of managing public debt in a challenging economic environment.