A 20-year review of Ghana’s public debt: trends, drivers, and implications (1)
Ghana's macroeconomic performance over the last few decades and leading up to the COVID-19 pandemic was touted by the country’s development partners as impressive.
Before the pandemic, Ghana posted historically high levels of growth; an average of 5.4 per cent from 2000 to 2009 and an average of 6.8 per cent from 2010 to 2019.
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From 2010 to 2019, Ghana was consistently ranked in the top 10 fastest-growing economies in the Sub Saharan Africa (SSA) sub-region. While the economy has grown substantially in recent decades, the average Ghanaian income, as measured by real Gross Domestic Product (GDP) per person, has grown an average of one per cent per year over the past 60 years.
At this rate of income growth, it will take roughly 10 more years for Ghana's average income in 1960 (US$1,110) to double (reach US$2,220). The pace of economic growth over the past decade was primarily driven by strong growth in the prices and production of major export products.
This led to a reduction in the population living in extreme poverty and resulted in the country moving to lower-middle-income country status (World Bank, 2020). While there has been improvement, it is worth mentioning that approximately 30 per cent of the Ghanaian population lives on less than US$3.20 a day at 2011 international prices.
Increase in public debt
The macroeconomic gains made over the past decade and the potential for greater income growth are being challenged by the rapid increase in public debt and relatively slower economic growth due to the COVID-19 pandemic.
The rapid increase in the public debt, slower economic growth and global economic uncertainties pose significant challenges for Ghana and put the country's progress toward sustainable growth and development at risk.
Despite the advances in social development, the nation’s potential is still constrained by insufficient investment in public infrastructure and social services, particularly in rural areas. Domestic revenue is insufficient for recurrent expenditure and investments.
If the current trend in debt accumulation is not truncated, it could be challenging to facilitate the necessary socio-economic development without putting the nation at risk of a sovereign debt crisis.
Analysis of public debt
This report provides an analysis of Ghana's public debt from 2000 to quarter one of 2022. It specifically reviews the trends, patterns and drivers of the recent debt accumulation and outlines potential strategies to reduce the adverse impact on the economy and ensure sustainable financing of development.
There are rising concerns about a looming debt crisis on the African continent, and Ghana's current debt situation has led to its classification as being at a high risk of debt distress in the debt sustainability analysis of the International Monetary Fund (IMF) and World Bank.
This report utilises data from the World Bank, IMF, Ghana Ministry of Finance and Bank of Ghana. The following are the general findings of the report:
● Ghana has reported a significant rise in domestic and external debt over the last few years.
● The public debt to GDP ratio was 80 per cent by the end of the first quarter of 2022, a level not seen post-HIPC.
● The rapid debt accumulation over the past few years can be explained by internal and external factors.
● The acceleration of debt accumulation in Ghana has generally coincided with the following:
1. a persistent fiscal deficit;
2. a saving-investment gap;
3. a deteriorating current account in addition to currency depreciation and terms of trade shock;
4. the search for higher yields by foreign investors, all of which have been exacerbated by the crystallisation of contingent liabilities arising from the energy sector bonds;
5. additional cost from the financial sector bailouts;
6. the economic fallout from the COVID-19 pandemic;
● Revenue mobilisation efforts have not kept pace with the rapid debt accumulation in recent years.
● The overall cost of debt service has been increasing due to an increase in non-concessional borrowing and the high cost of private short-term loans, including domestic and Eurobonds.
● The IMF/World Bank debt sustainability assessment (DSA) lists Ghana among countries at a high risk of debt distress.
Risk to economic growth
Without successfully implementing vigorous measures aimed at fiscal consolidations, the country's current debt situation poses a significant risk to both pre-pandemic economic momentum and the ability to attain the Sustainable Development Goals (SDGs) by 2030.
Caution is needed when comparing the country’s current debt to GDP ratio to emerging and advanced economies since those countries often borrow in their own currency at lower rates.
The current debt situation requires all stakeholders, including the government, our lenders, development partners, and civil societies, to rally together to devise the necessary measures needed for fiscal consolidation before the situation deteriorates into a full-blown sovereign debt crisis.
There are no easy solutions to the current debt situation. Costly long-term solutions, often unpopular politically, are required to restore Ghana’s debt to sustainable levels and put the country on the path toward sustained growth and improved living standards over the long term.
It is encouraging that the government has announced a 20 per cent cut in expenditure in the 2022 budget in response to the debt and fiscal sustainability concerns raised about Ghana and the subsequent downgrading of the country’s credit ratings.
From a social justice perspective, it is of critical importance to ensure that expenditure cuts do not target social expenditure such as health care, education, and poverty-reduction programmes. Identifying ways to increase domestic revenue and restructure current debts is equally important.
The remainder of this report is structured as follows: Section 2 reviews the socio-economic performance in recent decades; Section 3 examines the public debt accumulation over the past two decades, focusing on the trends, patterns, and drivers; Section 4 discusses the implications of debt accumulation for the economy; Section 5 discusses debt sustainability; Section 6 concludes with some policy recommendations.
