After sovereign default, Ghana’s economic challenges persist

Ghana is currently under a three-year IMF programme. It will receive $ 3 billion emergency lending in the years 2023 to 2026. The money is helpful, but insufficient for an economy with an annual GDP of about $ 80 billion. 

Since November 2021, the government has been unable to borrow money from the international Eurobond market. It is also struggling to borrow money domestically. In September 2024, it once more missed its target for selling domestic treasury bills. 

The debt remains unsustainable with interest rates on treasury bills of about 25 % or higher. Making things worse, high interest rates also haunt the private sector. Ghanaian banks are unable to offer corporate loans at rates below 30 %, and in some cases, interest rates are as high as 50 %. When credit is expensive, investments are expensive too, and that slows down the economy.

Inflation has fallen from more than 50 % three years ago to an annual rate of around 20 %. Growth is slowly improving, but it remains fragile. The output of cocoa – Ghana’s major export good and thus foreign-exchange earner – has been falling in the past three years. Part of the problem is that illegal mining is destroying and polluting both water bodies and lands. 

This is only one of many governance challenges Ghana is facing. The government must:

• cut frivolous expenditures, 
• significantly reduce corruption in public procurement, 
• eliminate fiscal waste (for instance by not abandoning projects and beginning new ones) and 
• boost domestic revenues. 

If it fails to do these things, debt problems will keep recurring. Given the tight fiscal space, the dysfunctions listed above reduce the government’s ability to help the poor through subsidies for healthcare, education and fuel. It will also remain unable to boost economic growth with the provision of reliable infrastructure. EEG, the deeply indebted state-owned electricity company, for example, is known for power failures. To understand the situation, it is important to consider how the sovereign default of 2022 came about. 

Assessing past failure

In the decade up to 2020, Ghana’s economy grew by about 6.6 % per year. Poverty went down, though inequality did not. The country’s international reputation was comparatively good, and it gained access to the Eurobond market. For several reasons, however, the economy was more fragile than the growth rate suggested. Core issues included: 

• It was not diversified, with exports depending heavily on cocoa, gold and oil.
• Agriculture and the informal sector accounted for most livelihoods, even though the service sector’s share of employment had been growing slowly.
• The economy was not managed well, which was evident in periodic power failures known as “dumsor”.

In spite of these long-standing problems, inflation mostly remained in the single or low double digits for most of the 2010s. Ghana depends on imports, and the cedi, the national currency, kept depreciating. Containing the upward pressure on prices was thus a noteworthy macroeconomic achievement. 

From 2000 to 2008, Ghana had benefited from multilateral debt relief in the context of the Heavily Indebted Poor Countries (HIPC) initiative. In 2008, it achieved the status of a lower middle-income country as its annual per-capita income rose over $ 1000. From that point on, Ghana was not eligible for the same amount of grants from multi- and bilateral development agencies. 

Unfortunately, the country proved unable to keep government budget deficits and sovereign debt under control. Its fiscal deficits kept getting worse. The IMF reckons that they increased by over three percent of GDP each year on average in the past 12 years of the three most recent electoral cycles. As a matter of fact, the government had even needed support from the IMF’s Extended Credit Facility (ECF) from 2015 to 2019. 

In 2021, the debt-to-GDP ratio increased to more than 100 %. In November, the government lost its ability to raise new private-sector credit in the Eurobond market. Eight months later, the government had to turn to the IMF for assistance once again. 

In December 2022, the government defaulted on much of its domestic and external debt. It launched Ghana’s Domestic Debt Exchange programme, restructuring domestic credit worth about approximately 137 billion cedis (the equivalent of about $ 10 billion). Ghanaian holders of sovereign debt lost at least 30 % of their money. This “haircut” set the stage for international action. In June 2024, Ghana reached an agreement in principle with its international bondholders on restructuring $ 13 billion of external debt. That deal has not been finalised, but it would impose a haircut of up to 37 % on bondholders. 

Causes of Ghana’s debt problems

Ghana’s persistent fiscal deficits were driven by excessive state spending, weak government revenues and – especially in election years – fiscal indiscipline. Rising oil revenues only mitigated the impacts to a limited extent. 

From 2015 on, government revenues stayed stagnant. Tax collection was too weak. Over the past two decades, Ghana’s tax revenue amounted to about 13 % of GDP, and that share was below the sub-Saharan African average of 15 %, according to the IMF. 

The tax system actually bypasses most people entirely. In 2017, the Ghana Revenue Authority had disclosed that only 1.2 million of 27 million Ghanaians were paying income tax. In other words, only 10 % of the labour force were taxpayers. The informal sector, which employs about 90 % of the working population, contributed less than five percent to the total tax revenue. 

Official development assistance (ODA) was dwindling moreover. In 2008, grants from donor agencies had amounted to two percent of GDP. That money evaporated fast after Ghana’s rise to lower middle-income status. By 2018, its share had dropped to a mere 0.3 % of GDP. 

While government revenues stagnated, state spending became increasingly misguided. Historically, investment in infrastructure was the biggest component of Ghanaian state expenditure. However, wages and salaries for the bloated public sector became increasingly more important. As early as 2013, the finance minister disclosed that the government had spent 70 % of its total revenue on public-sector staff in the first half of the year. 

Various forms of corruption played a role. Government agencies’ staff lists, for example, included ghost names. Moreover, too much money was used for vanity projects or inflated government contracts.

Unheeded warning signs

It is tempting to blame Ghana’s debt problems on the Covid-19 pandemic, which began in March 2020. While the pandemic certainly had an adverse effect on the fiscal performance, the plain truth is that the debt burden had become unsustainable before this global health crisis set in. 

It was telling, for example, that Ghana had found it increasingly difficult to access private-sector funding. The government ended up paying increasingly higher interest rates for new bonds. In 2015, it needed a World Bank guarantee worth $ 400 million to raise $ 1 billion of private money. 

A debt sustainability analysis which the IMF carried out in 2018 showed that Ghana was at a high risk of external debt distress. Various scenarios showed that both the depreciating exchange-rate and the declining exports were likely to make the debt burden unsustainable. 

In the same year, Ghana’s Ministry of Finance also did a debt sustainability analysis. It showed that two important indicators (the ratio of debt service to government revenue and the ratio of debt service to export revenues) were above the thresholds that signal shaky liquidity. Another warning sign was that both ratios were set to stay elevated. 

Contrary to IMF advice, moreover, the government did not include the debt owed by state-owned enterprises in public debt. The IMF had also bemoaned that the government was running some operations off-budget. Such practices reduce transparency, make oversight and management of the debt more difficult and increase the scope for corruption. 

The moment of truth came on 24 November 2022 when the restructuring of domestic debt was announced. The Ministry of Finance suddenly admitted that total public debt – “including that of state-owned enterprises” – exceeded 100 % of GDP. Only 11 days earlier, it had been declared as only 75.9 %. Later IMF analyses showed that the Cocoa Board in particular had accumulated a large debt. 

Conclusion

Unfavourable events like the Covid-19 pandemic and falling commodity prices had an adverse effect on Ghana’s fiscal position. To a very large extent, however, Ghana’s fiscal crisis was homemade. The government did not act in the necessary responsible manner. The country needs prudent and holistic fiscal management. Sound macroeconomic management helps a country stay resilient when hit by external shocks by minimising negative impacts. Developing countries must solve their own fiscal problems. Given that high-income countries face serious bedgetary deficits, any resources from OECD, the IMF, World Bank et cetera will be meagre, not more than small drops in a messy fiscal ocean.

J. Atsu Amegashie is a professor of economics at the University of Guelph in Ontario, Canada. 
jamegash@gmail.com