Ghana’s Debt Crisis: The Consequences of Six Years of Reckless Borrowing and Mismanagement.

Last year December (28/12/2021), I wrote an article titled “Trouble in Paradise: Ghana, the Land of Gold & Wahala”. In this article, I detailed the dangerous economic mess Ghana finds itself in and the consequences for the nation. In the year 2022, Ghana experienced most of what was predicted in the article.

Ghana is currently in negotiations with the International Monetary Fund (IMF) for financial support and a potential bailout. The reasons for seeking a bailout from the IMF include but are not limited to the following: Ghana’s high levels of debt have made it difficult for the country to borrow money from international financial markets at affordable rates (Ghana is currently locked out of the international credit market). Ghana’s economy has been struggling with extremely high inflation, a weak currency, and slow growth. The government of Ghana has been unable to implement the structural reforms needed to improve the economy, such as reducing corruption and improving the business environment (stimulating entrepreneurial growth). The country’s fiscal position is extremely weak, with high levels of government wasteful spending and a large budget deficit. Ghana has been unable to access international financial markets to fund important development projects, which has limited its ability to invest in infrastructure and other areas that could boost economic growth.

International credit rating agencies like Moody’s, Fitch and Bloomberg have downgraded Ghana’s credit ratings, citing a number of reasons for the downgrade including the ones listed above. Some of the specific reasons cited include the country’s high debt levels, its weak fiscal position, and its lack of progress in implementing structural reforms to improve the economy. The downgrade (to junk status) has raised concerns about Ghana’s ability to repay its debt and has led to a decrease in foreign investment, affecting the country’s economic prospects. A low credit rating (downgrade to junk status) can have a negative effect on a country’s economic prospects. When credible credit rating agencies like Moody’s, Fitch, or Bloomberg downgraded Ghana’s credit rating, it sent a strong signal to investors (both domestic & international lenders) that the country is a less desirable place to invest in, which led to a decrease in foreign investment. This development made it more difficult and more expensive for Ghana to borrow money from international financial markets, which then limited Ghana’s ability to fund important development projects. The low credit rating (junk status) also affected the country’s currency, as investors dumped the currency as they perceive it as being less stable. All of these factors have had a negative impact on Ghana’s economic growth and development prospects.

Ghana’s negotiation with IMF required debt sustainability analysis. The outcome of the analysis indicated that Ghana has to restructure its debt to become sustainable within a ten-year horizon. This debt restructuring has both negative and positive effects on investor confidence, inflation, unemployment, and economic recovery measures.

One negative effect of debt restructuring is that it may cause investors to lose confidence in the country’s ability to repay its debt on time. This could lead to a decrease in foreign investment and an increase in the cost of borrowing for the government and local businesses. The decreased foreign and domestic investment has a ripple effect on the local economy. As businesses struggle to access the capital they need to grow and hire workers, the unemployment rate in Ghana has dramatically increased. This lack of investment could also lead to an increase in the cost of borrowing for the government and local businesses, making it more difficult for them to finance their operations and invest in growth.

However, a positive effect of the debt restructuring is that the IMF bailout and support could help Ghana to address its debt issues and improve its economic stability. A successful IMF negotiation could restore investor confidence in the long term and make the country more attractive to investors again. Consequently, businesses could have an easier time accessing the capital they need to grow and create jobs, leading to a decrease in the unemployment rate. The catch here is, improved economic stability could also lead to an increase in demand in the economy, which could in turn drive up prices and lead to another cycle of increase in inflation.

There are several debt restructuring schemes that the Ghana government is currently embarking on in order to address its debt issues and promote economic stability. These include negotiating with creditors to extend the repayment terms of its debt and implementing fiscal reforms to improve its debt sustainability while seeking support from the IMF. The specific debt restructuring schemes that Ghana may pursue in its negotiations with the IMF could include debt forgiveness, debt restructuring, debt consolidation, or a combination of these approaches. Debt forgiveness involves the cancellation of a portion of the country’s debt, allowing it to reduce its overall debt burden. Some of the domestic debt restructurings involve changing the terms of the country’s existing debts, such as extending the repayment period or reducing the interest rate, in order to make the debt more manageable (the so-called haircuts). Debt consolidation involves combining multiple debts into a single, larger debt, which can make it easier to manage and repay.

In terms of the effects on the domestic bond market and local financial institutions (banks, insurance & pension scheme agencies), debt restructuring could have both direct and indirect effects. The direct effect is that the restructuring may result in a loss of value for domestic bondholders. This could lead to a decrease in demand for Ghanaian bonds and a decrease in the overall value of the bond market. The indirect effect is that the restructuring could affect the stability of local financial institutions. If the government is unable to manage its debt restructuring process properly, the economy will suffer as a result, local banks could face increased risks and potentially experience financial difficulties. This could lead to a decrease in the availability of credit for local businesses and households, hindering economic growth. To protect domestic bondholders and promote economic stability, the Ghana government should consider implementing measures such as increasing transparency in the management of its debt and seeking to diversify its sources of financing. Additionally, the government should carefully consider the potential effects of the various debt restructuring schemes and choose the approach that is most likely to promote economic recovery and stability in the long term.

Overall, the debt restructuring and potential IMF bailout could have both positive and negative effects on Ghana’s economy. While it may lead to short-term pains & challenges, such as an increase in inflation and a potential decrease in the value of domestic bonds, it could also provide the country with the support it needs to address its debt issues and promote economic recovery in the long term. To protect domestic bondholders and promote economic stability, the Ghana government should consider implementing measures that will boost confidence in the financial sector while stimulating economic growth. To stimulate economic recovery in these difficult times, the government should consider some fiscal stimuli measures, such as government spending on infrastructure projects and tax cuts (instead of the current tax increases), that can help to boost economic activity (stimulate consumption) and create jobs (helping entrepreneurs). Embarking on monetary policies, such as reducing interest rates, can encourage borrowing and investment, stimulating economic growth. Deregulation and other measures to improve the business environment can help to increase competition and encourage entrepreneurship. Investment in education and training can increase the productivity and competitiveness of the workforce. Policies to support small and medium-sized enterprises can help to promote entrepreneurship and innovation and drive the economy back on track.

This article just gave an academic perspective on the ongoing economic crisis in Ghana, how the Government and the Citizens of Ghana navigate the difficult years ahead will define our unique developmental path in the West African Subregion.

Article by

Dr. Amos Mensah

He is a highly qualified and experienced professional in the field of agricultural economics and natural resource management. With a Ph.D. in Agricultural Economics from the Georg-August University Göttingen in German. He is also a dedicated teacher and mentor, currently serving as a lecturer at the Department of Agricultural Economics, Agribusiness & Extension (DAEAE) — College of Agriculture and Natural Resources (CANR) at KNUST Ghana. 

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