<mark>Ghana’s total public debt back to a sustainable path [.......] with PV of public debt declining to around 40 percent of GDP by the end of the projection period”. That meant reattaining sustainability by 2035.</mark> <mark>For economists acquainted with public debt crises in EMs, this leisurely time frame for reattaining public debt sustainability without a crisis would have been considered unrealistically long given the level of public debt, its dynamics and market sentiment. Alarm bells for drastic fiscal consolidation should have been ringing loudly in early 2016.</mark> As it turns out, the debt data shown in the public sector DSA in IMF (2021) contain a surprise. Public debt was estimated at 78% for 2015 in the 2016 DSA and shown in Table 2 above. Yet the DSA in IMF (2021) shows the public debt-to-GDP ratio (d) for 2018 at just 58%, a decline of 20 percentage points of GDP in three years.<sup>8</sup> Given the adverse public debt dynamics that prevailed in 2016, two possible explanations for the sizable drop in d are first, a commendable fiscal effort; and second, large revisions. As it turns out, Ghana was “bailed out” by another rebasing of GDP in 2017 that increased GDP by 26%. Without this boost to GDP, d for 2018 would have been a significantly higher 73%.<sup>9</sup> In addition to the GDP rebasing, two other idiosyncrasies are worth mentioning.

1. Ghana’s GDP level has been periodically boosted by new oil discoveries. These raise GDP significantly in the year when they become operational, and therefore lower d, but without a sustained increase in the growth rate. Box 1 in the DSA in IMF (2021) notes the key role of oil discoveries in supporting growth, containing the current account deficit and boosting FDI.

2. Oil discoveries would also raise primary fiscal surpluses and increase foreign exchange reserves, causing the exchange rate to strengthen but, once again, on a one-off basis.

Controlling for such idiosyncrasies by running “with” and “without” scenarios is important to get a clear idea of underlying public debt dynamics and is something the LIC DSF should be required to do. Indeed, d returned to an explosive path, rising from 58% in 2018 to 79% in 2020 and was projected to rise further to 87% in 2026 in the DSA in IMF (2021). The temporary salutary effects of GDP rebasing and new oil discoveries had worn off and the underlying explosive dynamics took hold again.

Nevertheless, as in 2016, the 2021 DSA rates Ghana at high risk of both external and overall debt distress but qualifies this by noting that “ <mark>public debt is sustainable provided that the authorities’ medium-term consolidation plan (reflected in the baseline) is rigorously and credibly implemented to improve the primary balance, put debt on a declining trajectory, and ensure continued market access”.</mark> _Applying the alternative approach using data from the 2021 DSA_ We now repeat the steps gone through in the context of IMF (2016) to see what information and early warning can be gauged from the alternative approach set out above. We first make the case that public deficits drive the CAD and then examine public debt dynamics. This time, we calculate three interest rates: the composite real interest rate and its domestic and foreign currency components along the lines of the numerical example in Box 1. Annex 1 derives the formulas based on the first-order difference equation for the ratio of public debt to GDP, which forms the basis for the public sector DSA in the LIC

> 8 An explanation for this sizable drop in d would be helpful, but such disconnects across IMF-WB DSAs are not uncommon. A 5-year lookback period tracking changes in d and the underlying contributory factors (pd, r, g, with r broken down into its local currency and fx components) would be a useful addition to the DSA.

> 9 If is the rebasing coefficient, 1 is the nominal debt-to-GDP ratio before rebasing and 2 after rebasing, then 2 1 . For the 2017 rebasing, see Oxford Business Group  “GDP rebasing improves Ghana’s economic <u>outlook</u> δδ ” 16 November 2018. dd dd dd = dd /(1 + δδ)

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