Ghana, Crippling Debt, IMF & the Way Forward

BY: Dr Sodzi Sodzi-Tettey

Ghana has historically captured positive global attention for its focus on economic growth, use of natural resources, development partner relationships, and drive to continue being a key contributor to the emerging West African economy.

In recent years, the country’s string of subsequent economic and financial challenges has amplified the broader discussion about the best path forward and prospects for the economy. The Centre for Social Justice (CSJ) has compiled the following Public Debt report to summarise Ghana’s current economic situation as it relates to public debt and highlight some of the themes that both current and historical data indicate are behind the challenges. In the report, CSJ also aggregates years of research and academic/professional experience to provide thoughtful recommendations consistent with its focus on growth through socio-economic infrastructure and equitable economic prosperity.

This Public Debt report uses data from the World Bank, IMF, Ghana’s Ministry of Finance, and Bank of Ghana. CSJ’s research into Ghana’s economy has been extensive. While various reports from other government ministries and sources were reviewed as part of the comprehensive research, data from the sources listed in the report are from institutions that are publicly accessible and provided the most current and consistent information.

Ghana’s public debt to GDP ratio reaching levels not seen post-HIPC (since 2004) can be explained by internal and external factors.

The country’s overall cost of debt service has been increasing due to the increase in non-concessionary borrowing as well as obtaining private short-term, domestic, and Eurobond loans at higher interest rates. The acceleration of debt accumulation 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.
  7. Revenue mobilisation efforts lag the rapid debt accumulation in recent years.

Based on the Debt Sustainability Analysis of the International Monetary Fund (IMF) and World Bank, Ghana’s is classified as a country with a high risk of debt distress. Equally concerning is how revenue mobilization efforts have significantly lagged the pace of debt accumulation in recent years. In the past five years, the country’s debt to GDP ratio has significantly increased while the revenue to GDP ratio has steadily declined. CSJ strongly believes certain measures need to be implemented soon to curtail the pace of debt accumulation and focus on the efficient management of the economy in its entirety.

Meaningful steps must be taken immediately in order to begin restoring the country’s orderly access to international debt markets. CSJ does not believe the country needs to halt all borrowing. However, it does believe the current debt situation requires a renewed focus on debt sustainability and policies/projects that can generate the economic activity necessary to not only support but curtail the existing debt. This renewed focus must include all stakeholders, including the government, our lenders, development partners, and civil societies, to rally together to devise the necessary measures needed before the situation deteriorates into a full-blown sovereign debt crisis.

CSJ welcomes the government’s decision to commence formal engagements with the IMF with the view to reaching a policy program capable of restoring market confidence and helping the country Surmont current debt challenges. We call upon the government to demonstrate a thorough understanding of Ghana’s own existing debt and terms, proactively approach the IMF with a realistic programme and be willing to have a broader debt restructuring conversation with all current major creditors.

The extent of engagement with the IMF could lead to further expenditure rationalization, which could potentially reduce aggregate demand and temporarily slow economic growth. To this extent, it is our hope that every effort will be made by government to cushion the effects of any such expense rationalisation on marginalised and economically disadvantaged persons and communities in our society. This is also a good time for government to take a hard and sober look at reducing the size of government and by extension, the significant costs associated with the political bureaucracy.

CSJ believes the following additional short-term and medium-to-long term strategies should be incorporated in any solution:
Short-term Strategies:

  1. Immediate fiscal consolidation efforts aimed at enhancing revenue mobilisation and reducing expenditures.
  2. Engage creditors to initiate a process for debt reprofiling and restructuring.
  3. Implement the Rationalized Convergence Criteria in the ECOWAS region, in preparation for the launch of the ECOWAS Single Currency.

Medium- to Long-term Strategies:

  1. Increase cooperation with development partners to enhance responsibility, transparency, and mutual accountability in lending practices, to minimize inefficiencies in borrowed funds.
  2. Reform and strengthen public debt governance with an emphasis on increasing transparency and accountability in borrowing and public debt utilization decisions.
  3. Expand on inclusive policy building to promote an equitable agenda that transcends short-term changes in governance.
  4. Reduce public debt proceeds allocated towards stimulating the economy through consumption.
  5. Reduce the savings-investment gap by efficiently applying debt to finance industrial policies.
  6. Increased focus on international macroeconomics and global economic cycle and the implications for the domestic economy, investment, and debt finance.
  7. Increased efforts to strengthen domestic revenue mobilization through innovation.

Ghana currently faces significant developmental challenges, and the current financing framework, over-reliance on high-cost debt, mostly non-concessional, is unsustainable. As a result, there is an immediate need for the country to adopt an effective financing framework to meet the current challenges. There are no easy solutions for moving the country towards a sustainable debt path. However, a new financing framework that ensures debt sustainability is necessary to put the country on the path of steady progress towards attaining the Sustainable Development Goals and boost resilience even when future economic challenges emerge.

Finance & Economy Pillar
Centre for Social Justice
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5th July 2022

Dr Sodzi Sodzi Tetteh