Borrowed Burdens: Unraveling Public Debt in Ghana

In the heart of West Africa, Ghana stands at a pivotal crossroads. Once hailed as an economic success story, this vibrant nation now grapples with a mounting debt crisis that threatens to undermine decades of progress. The story of Ghana's debt dilemma unfolds like a modern-day epic, where the promise of prosperity clashes with the harsh realities of fiscal constraints.

As the sun sets over Accra's bustling markets, the whispers of anxious vendors echo the broader concerns of a nation. How did Ghana, with its rich natural resources and a burgeoning middle class, find itself ensnared in the web of debt? The tale begins with ambitious infrastructure projects and social programs aimed at uplifting millions, but it soon spirals into a complex narrative of economic missteps, external shocks, and the relentless pursuit of growth.

Against this backdrop, the Ghanaian government faces tough choices, to seek relief through international bailouts or to tighten its belts and weather the storm. 

In the villages and urban centers alike, the people of Ghana watch with bated breath, their hopes tethered to the resilience and ingenuity that has defined their history. As the nation charts its course through this fiscal tempest, the world watches, eager to see how Ghana will redefine its future in the face of adversity.

Ghana in Africa

Economy of Ghana

Ghana's real GDP growth decreased from 3.8% in 2022 to 2.9% in 2023, influenced by Russia's invasion of Ukraine, global financial conditions, and macroeconomic challenges. Industry-led growth, while inflation worsened from 31.5% in 2022 to 40.3% in 2023.

Image source: AFDB Report

The pace of exchange rate depreciation decreased from 60% in 2022 to 17% in 2023, with adjustments in macroeconomic policies. The fiscal deficit narrowed from 11.8% of GDP to 4.5%, while public debt dropped from 92.4% to 84.9%. The current account deficit narrowed from 2.1% to 1.7%, and gross international reserves shrank from $6.3 billion to $5.0 billion. The financial sector remained sound, but its capital adequacy ratio declined.

The COVID-19 pandemic has slightly increased multidimensional poverty from 46% in 2017 to 46.7% in 2022, while youth unemployment remains high at 7.16%, notably among 15-24-year-olds.

What is Public Debt?

Public debt, also known as government debt, refers to the total amount of money borrowed by a government to finance its expenditures. It includes both internal debt (domestic debt) and external debt (foreign debt). The accumulation of public debt can be driven by various factors, including fiscal deficits, economic shocks, and development projects.

Ghana's public debt reached GH₵610 billion in December 2023, accounting for 72.5% of its GDP, a 26.85% increase from the previous year, highlighting the country's growing debt burden.

Effective public debt management is crucial for fiscal sustainability and economic growth. It involves prudent strategies like using debt for productive purposes, maintaining a reasonable debt-to-GDP ratio, and timely debt servicing. However, many African countries face challenges due to limited fiscal space, economic shocks, and financing development projects.

Public debt in Africa is a significant concern, with many countries experiencing rapid debt increases. Effective debt management is crucial to prevent unsustainable debts, threatening economic stability and development.

Causes of Public Debt in African Countries

Image source: IMF

The main causes of public debt in African countries can be broadly categorized into internal and external factors. Here are some key causes:

Internal Factors

Poor fiscal policies and resource misallocation can lead to inefficient borrowing and increased debt levels, while corruption and weak governance structures can dilute development funds, causing increased borrowing to cover budget deficits.

Image source: Ghana Public Debt (% of GDP) - FocusEconomics (focus-economics.com)

Limited tax bases, inefficient collection systems, and reliance on a few commodities can hinder revenue generation, leading to borrowing. Excessive government spending on non-productive sectors or recurrent expenditures can outpace revenue, while political instability and conflicts can disrupt economic activities and increase government spending.

External Factors

African economies heavily rely on commodity exports, and fluctuations in global commodity prices can significantly impact revenue, leading to increased borrowing to fill budget gaps.

Image source: Financial Crisis

Economic shocks like global financial crises, pandemics, and natural disasters can strain public finances, leading to increased government borrowing. High interest rates and exchange rate volatility can increase debt service costs and accumulate debt. Local currencies depreciate, further increasing the cost of servicing foreign-denominated debt.

Aid dependency can lead to debt accumulation, especially if not used for sustainable development, and persistent trade deficits can result in borrowing to finance the balance of payments.

Structural Issues

Underdeveloped financial markets and limited long-term financing options in countries lead to reliance on external borrowing. Rapid population growth increases demand for public services and infrastructure, resulting in higher public spending and infrastructure deficits.

Public Debt of Ghana - Hard Facts

Here's a breakdown of public debt levels for the mentioned countries:

Ghana's public debt amounted to 92.4% of GDP in 2022, with external debt at $24.7 billion and domestic debt at $26.1 billion, representing 37.0% and 39.1% of GDP, respectively.

Here is a graph illustrating Ghana's external debt from 2010 to 2023. The data shows a steady increase in external debt over the years, reflecting the country's borrowing trends to finance development projects and manage economic challenges.

Ghana's Public Debt Compared to Other Sub-Saharan African Countries

Ghana is not the only African country experiencing significant increases in public debt-to-GDP ratios. As of 2021, over three-quarters of Sub-Saharan African countries had public debt levels above 50% of GDP, with some like Eritrea, Cabo Verde, and Zambia already experiencing debt distress.

Ghana's public debt has increased significantly, reaching 80.1% of GDP in 2021, surpassing many other Sub-Saharan African countries. Togo and Senegal's public debt increased by 11 and 22 percentage points, respectively, while Ethiopia's public debt remained relatively stable.

In 2022, Ghana's public debt composition differs from other Sub-Saharan African countries, with a higher share of domestic debt (41.4%) compared to external debt (39%), a trend that has been observed in many other countries.

As of February 2024, Ghana's public debt has surged by GH¢47.4 billion, reaching a total of GH¢658.6 billion. This accounts for 62.7% of the Gross Domestic Product (GDP). The external debt stands at GH₵380 billion, equivalent to 36.1% of the GDP. Compared to this, Nigeria's domestic debt is largely domestic. Different types of debt expose countries to foreign exchange and refinancing risks, while domestic debt can pressure local interest rates in underdeveloped financial markets.

Image source: IMF

In summary, these countries face a complex interplay of factors, including fiscal deficits, external shocks, and policy choices driving their public debt levels. Addressing these challenges requires prudent fiscal management, transparency, and sustainable development strategies. 

Image source: The Economist

Ghana's rising public debt levels and a preference for expensive domestic borrowing have increased its debt servicing costs and vulnerability to debt distress, contrasting with other Sub-Saharan African economies that have maintained more sustainable public debt levels.

Main Drivers of Debt Accumulation in Ghana

Ghana's rising public debt is a result of persistent fiscal deficits, which often lead to borrowing when spending exceeds revenue. Insufficient domestic savings and increased reliance on external borrowing are also contributing factors. The deteriorating terms of trade for commodity exports also affect Ghana's revenue management.

Image source: Ghana - External Debt (reuters.com)

Image source: Ghana - Domestic Debt (thomsonreuters.com)

Image source: Ghana’s public debt stock

Factors for Increase in Ghana's Public Debt

Ghana's public debt ratio has risen due to fiscal deficit expansion, resulting in persistent budget deficits. The country has borrowed both externally and domestically to boost economic growth and increase capital stock. The COVID-19 pandemic and the Russia-Ukraine war worsened Ghana's debt situation, prompting the government to implement expansionary fiscal policies.

Ghana's debt crisis is exacerbated by its higher domestic debt composition, longer maturities, and lower access to international capital markets. The government's reliance on central bank monetary financing in late 2021 further exacerbates the issue. Ghana's public debt rose from 54% in 2017 to 98.7% by 2023, largely due to persistent fiscal deficits and unfavorable debt composition.

Image source: IMF

The graph indicates a depreciation trend in the Ghanaian Cedi against the US Dollar, while Ghana's reserves show an upward trend, indicating efforts to build and maintain them. The debt-to-GDP ratio consistently increases, indicating a significant increase in Ghana's public debt.

Ghana's Domestic Debt Compared to Its External Debt

As of February 2024, Ghana's public debt has surged by GH¢47.4 billion, reaching a total of GH¢658.6 billion. This accounts for 62.7% of ‌Gross Domestic Product (GDP). The external debt stands at GH₵380 billion, equivalent to 36.1% of the GDP.

Ghana's external debt, including Eurobonds and debt to bilateral/commercial creditors, is a significant part of the country's overall public debt. The country is currently in negotiations with external creditors, including the IMF, to restructure its $13 billion in international bonds.

Ghana is losing around 30% of its government revenue annually to external debt service payments, a heavy debt burden that severely restricts the government's fiscal space and ability to invest in development priorities.

Main Sources of Ghana's Domestic Debt

Ghana's public debt, including domestic debt, has been increasing due to increased government borrowing and fiscal deficits. In late 2022, the country initiated a domestic debt restructuring program to manage its significant debt burden, halting domestic debt service payments, a key component of the country's current debt.

Ghana's fiscal deficit financing has shifted to domestic borrowing, leading to a rise in domestic debt stock, now a significant portion of the country's public debt. Factors like currency depreciation, high inflation, and economic shocks have exacerbated Ghana's domestic debt burden, making it more challenging for the government to manage its obligations.

Debt-to-GDP Ratio

Image source: tesahcapital

The debt-to-GDP ratio is the ratio between a country's government debt and its gross domestic product. A low debt-to-GDP ratio indicates an economy capable of paying back debts without further debt. Used to assess the government's and nation's financial health; different ratios reflect different financial aspects

In general, the factors affecting the debt-to-GDP ratio are government spending and budget deficits,

economic growth rate, interest rates on government debt, inflation, and currency exchange rates.

Image source: IMF

Here is a brief comparison of Ghana's debt-to-GDP ratio to other highly indebted countries:

Ghana's Debt-to-GDP Ratio 

Ghana's public debt reached 88% of GDP in 2022, the highest in Africa, with a lower debt ratio of 52% using adjusted GDP figures. As of February 2024, Ghana’s public debt stands at GH¢658.6 billion, which accounts for 62.7% of the Gross Domestic Product (GDP). The external debt component is GH₵380 billion, equivalent to 36.1% of the GDP.

Comparison to Other Highly Indebted Countries

Ghana ranks among Africa's most indebted countries, with a debt ratio of 119% in 2021, compared to Zambia's 119%. Lebanon and Sudan have the highest debt-to-GDP ratios globally, with Lebanon at 194% and Sudan at 178%. Japan has the highest debt ratio among advanced economies at 263%.

Projections for Ghana's Public Debt 

Ghana aims to reduce its debt-to-GDP ratio from 105% to 55% by 2028 through fiscal consolidation. The nation plans to restructure $13 billion of external debt with international bondholders by September 2024, potentially boosting investor sentiment and capital inflows, while the US monetary easing cycle could pressure the dollar.

Image source: statista.com

To reduce the debt ratio to 55% by 2028, significant fiscal adjustments and debt restructuring are needed. High debt levels and servicing costs pose significant risks to Ghana's economic and financial stability. Sustained economic growth, improved revenue mobilization, and prudent debt management are crucial for reducing debt burden.

In summary, while Ghana's public debt is projected to decline over the next decade, it will likely remain elevated and require concerted efforts to achieve the government's debt reduction targets.

Fitch Solutions

Fitch Solutions predicts that the Ghana cedi will recover against the dollar in the coming months due to improved investor sentiment, higher dollar inflows, and easing external conditions. The firm expects greater stability for Sub-Saharan African currencies in the second half of 2024. Ghana's market sentiment is weak due to debt restructuring negotiations, but economic recovery increases foreign exchange demand.

Composition of Ghana's Public Debt (Domestic Vs. External) and Impact on Its Economy

Ghana's domestic public debt, with high interest rates and shorter maturities, increases debt servicing costs and burdens the government's budget. This short maturity profile increases vulnerability to debt distress, making it more susceptible to rollover risks and market fluctuations. High debt servicing costs have limited fiscal space for public investment, limiting private investment, and posing challenges to Ghana's long-term economic growth prospects.

Ghana's Reliance on External Debt Affecting Its Economic Stability

Ghana's debt crisis worsened in late 2021 due to a loss of market access to international capital markets. In December 2022, the country defaulted on a significant portion of its external debt, forcing the government to rely more on domestic borrowing. As of 2024, the country has restructured a significant portion of its domestic debt but faces ongoing challenges with external creditors.

The high cost of servicing external debt has limited fiscal space for public investment and service delivery, with 60% of government revenue devoted to interest payments in 2024. This burden has slowed private investment, affecting long-term economic growth, and increased real interest rates.

Ghana's external debt, currently at 105% of GDP, is unsustainable, causing a potential hindrance to future external funding and private investment. Ghana's currency depreciation caused a 40% inflation rate in 2022, impacting purchasing power and living standards. As of June 2024, the annual consumer inflation rate stands at 22.8%, the lowest since March 2022, but still above the central bank's target range.

Challenges Ghana Faces in Servicing Its External Debt

Ghana's external debt service payments are consuming its convertible currency, limiting its import capacity and imposing domestic investment constraints. Unsustainable levels of external debt make it difficult to secure new funding and invest in long-term growth initiatives. External economic shocks like COVID-19 and the Russian-Ukrainian war have worsened the debt situation.

Image source: High inflation

High inflation and currency depreciation have weakened purchasing power and increased debt servicing costs, causing economic strain. The government's revenue is primarily used for debt servicing, limiting fiscal space for essential services and investment. Ghana's loss of international capital markets has led to increased domestic borrowing and monetary financing, potentially causing costly and unsustainable long-term financial stability.

Key Differences in the Impact of Domestic Vs. External Debt on Ghana's Economy

Ghana's rapid increase in domestic debt has been found to boost growth, but its short-term impact on GDP is negative. This raises concerns about the impact on private sector growth and debt sustainability. External debt inflows positively influence Ghana's GDP growth, while debt servicing has a negative 'crowding out' effect, leading to a large debt burden, crowded out private investment, and contributing to macroeconomic instability.

Foreign Exchange Reserve

In December 2023, Ghana's Foreign Exchange Reserves reached 2.5 months of import, with a 15.6 USD bn YoY increase in Money Supply M2. Domestic Credit reached 17.3 USD bn in April 2024, an 11.6% YoY drop. Ghana's Foreign Exchange Reserves increased to $6,594.40 million USD from $5,991.30 million USD in March of the same year. The Non-Performing Loans Ratio stood at 25.7% in April 2024.

Image source: tradingeconomics.com

Consequences of High Public Debt

High debt levels can cause a fiscal burden, as a significant portion of a country's budget is spent on servicing interest payments, limiting funds for essential services like education, healthcare, and infrastructure. Additionally, high public debt can discourage private investment, leading to higher interest rates and hindering economic growth.

Excessive debt can weaken a country's currency, causing capital flight, depreciation, and inflation. It also poses risks to investors, hindering foreign investment and reducing investor confidence. High debt limits governments' ability to implement counter-cyclical policies during economic downturns, potentially prolonging recessions and slowing recovery.

Debt-dependent economies are more vulnerable to external shocks like commodity price fluctuations and global crises, leading to debt distress and affecting stability and growth. High debt can cause social unrest, reduced public services, job losses, and income inequality, impacting governance.

Ghana Defaults on Debt

Ghana's external debt defaulted in late 2022, leading to a financial crisis. The government has since shifted to domestic borrowing and monetary financing, requiring debt restructuring and alternative funding sources. In 2024, Ghana completed a domestic debt restructuring program and restructured $5.4 billion of debt with official creditors to stabilize the economy and regain international financing access.

Potential Consequences for Ghana on Defaulting

The default on Ghana's cedi is expected to boost investor confidence in the country's debt repayment ability, making international capital market access more challenging and expensive. This could lead to further depreciation, inflation, and macroeconomic instability, and restrict Ghana's ability to secure new external financing for development projects and investments.

Image source: Ghana Cedi

The default on Ghana's debt could lead to a severe economic recession, causing increased unemployment, reduced living standards, and poverty. It could also strain Ghana's external creditors' relationship, complicating future debt restructuring negotiations and making it challenging to find a sustainable solution.

Impact of Default on Financial Institutions and Businesses

If Ghana defaults on its debt, the impact on local financial institutions and businesses could be significant and multifaceted.

The banking sector is facing instability due to increased Non-Performing Loans (NPLs) and liquidity issues. A default could lead to a rise in NPLs as businesses and individuals struggle to repay loans due to economic downturns and reduced consumer spending power. Additionally, a default on the Ghanaian cedi could result in significant depreciation, increased import costs, and inflation, negatively impacting businesses reliant on imported goods and materials.

Image source: Economic growth

A weak currency and increased import costs could cause inflation, reducing disposable income and consumer spending in retail and service sectors. This could also affect investor confidence, reducing FDI and higher borrowing costs, potentially stifling economic growth and potentially causing capital flight.

The government's potential budget cuts on essential services and infrastructure projects could negatively impact businesses reliant on government contracts and public investment, leading to economic hardship, social unrest, and political instability, further deterring investment.

Long-Term Implications of Ghana's Debt on Its Economic Growth

Ghana's high debt servicing costs, accounting for around 60% of government revenue, limit fiscal space for public investment in infrastructure and development, hindering long-term growth. The debt crisis has also negatively impacted foreign direct investment inflows, deterring investment due to investor confidence loss and economic uncertainty, which is crucial for productivity and growth.

Ghana's debt crisis has caused currency depreciation, high inflation, and macroeconomic instability, making it difficult for businesses to plan and invest for long-term growth. The country's heavy external borrowing vulnerability increases to shocks like commodity price fluctuations and global interest rate changes.

Foreign Investment

Ghana's high external debt levels, characterized by economic uncertainty and risks, discourage foreign investors, making the country less attractive for FDI. The government's debt servicing burden reduces fiscal space, negatively impacting private investment.

Image source: Foreign Direct Investment

Ghana's heavy external borrowing has caused currency depreciation and high inflation, creating an unstable macroeconomic environment that deters foreign investors. The debt crisis has led to a loss of market access to international capital markets, forcing the government to rely more on domestic borrowing.

Impact of Debt on Inflation Rates

Ghana's high public debt negatively impacts its inflation rates, with an increase in public debt correlated with higher inflation rates, especially in the long run, as budget deficits and monetary financing contribute to this relationship.

Infrastructure

Ghana's high debt servicing costs and lack of international capital market access have limited fiscal space for public investment in infrastructure and development, leading to a "crowding out" effect and hindering funding for critical infrastructure projects, further reducing available resources for investment.

Ghana's high debt levels have negatively impacted foreign direct investment (FDI) inflows, reducing financing for infrastructure projects and reducing overall economic growth. The debt crisis has led to currency depreciation, high inflation, and macroeconomic instability, making it challenging for the government to plan and execute long-term infrastructure investments.

Delayed Infrastructure Projects 

Ghana's President Akufo-Addo has attributed the country's high debt levels to delays in infrastructure projects, arguing that the government prioritizes debt servicing over new investments. In 2018, Ghana secured a $2 billion infrastructure deal with China for road construction, but concerns over transparency and debt sustainability have raised concerns. The debt crisis has led to reduced market access to international capital markets and increased domestic borrowing.

Credit Rating

Image source: Credit Rating

Ghana's rising public debt has resulted in significant credit rating downgrades, with Moody's downgrading its credit rating from B3 to Caa1 in February 2022, citing a "very high credit risk" due to its debt burden. The default and debt distress have strained its international credit relationship, leading to lenders being cautious and potentially increasing borrowing costs and reducing their willingness to lend due to the need for restructuring. This involved swapping $10.5 billion in local bonds, which aimed to stabilize its fiscal situation but initially led to credit rating downgrades due to concerns over the country's solvency and economic stability.

Political Landscape

Ghana's debt situation is likely to have significant implications for its political landscape in the coming years.

High debt levels and austerity measures may lead to public dissatisfaction and protests, as citizens affected by inflation, unemployment, and reduced services hold the government accountable. The ruling party may face electoral backlash in future elections, which opposition parties could exploit to gain political advantage and criticize the government's handling.

The government may adopt populist policies to address, potentially reversing austerity measures or increasing social spending, but this could lead to financial strain. Economic challenges could cause political instability, causing frequent cabinet reshuffles or leadership changes.

Image source: Public Dissent

Ghana's reliance on international financial institutions like the IMF for bailout packages could significantly impact its foreign policy and international relations, potentially affecting domestic and foreign policies, governance, electoral outcomes, and policy directions.

Social Impacts

Budget constraints can lead to cuts in public services like healthcare and education, compromising quality and accessibility. A weakened currency and higher debt servicing costs can cause inflation, increasing essential goods and services costs, and potentially pushing people into poverty. Economic slowdowns can result in job losses and higher unemployment rates, especially for vulnerable populations.

Image source: Unemployment

Economic hardship in Ghana can lead to social unrest, protests, and strikes due to dissatisfaction with the government's handling of the economy. Limited opportunities may prompt skilled workers to seek employment abroad, causing a brain drain that hinders economic recovery and development. These social impacts underscore the country's debt crisis's impact on citizens' well-being.

Debt Sustainability and Interest Rates 

Higher interest rates increase the cost of servicing existing debt, reducing funding for essential sectors like education, healthcare, and infrastructure. This can lead to debt distress and increased default risk, especially in countries with high debt-to-GDP ratios, making them vulnerable to interest rate fluctuations.

Interest rates, influenced by perceived risk, influence investor confidence and exchange rates. Higher rates increase borrowing costs, while interest rate differentials attract foreign capital and strengthen currencies, reducing debt servicing costs but potentially affecting export competitiveness.

High debt limits central banks' ability to manage inflation and economic growth, and raising interest rates can increase debt servicing costs. Countries with variable-rate debt face risks during global economic shocks, while fixed-rate debt provides stability but may be more costly.

Impact of Oil Revenue on Ghana's Debt Sustainability

Ghana, an oil-rich nation, discovered significant offshore oil reserves in 2007, including the Jubilee oil field, which became a vital part of its economy in 2010, with production beginning in 2010. Ghana's oil production is bolstered by significant oil fields like the Tweneboa, Enyenra, Ntomme (TEN), and Sankofa fields.

Image source: Oil revenue

A study revealed that Ghana's oil production has not significantly improved fiscal discipline and budget deficit reduction, leading to unsustainable public debt levels, consuming a significant portion of government revenues, and making effective debt management challenging.

Ghana's reliance on oil exports has led to macroeconomic instability and compromised debt management. Inadequate economic diversification in oil and commodity sectors hinders stable revenue and debt servicing obligations. Ineffective fiscal policies, poor public financial management, and governance issues also contribute to Ghana's oil wealth, emphasizing the need for stronger institutions and fiscal discipline.

Measures Taken to Manage Public Debt

Ghana is implementing a revenue-based fiscal consolidation program to reduce debt, focusing on expanding the tax base, improving tax compliance, and strengthening revenue administration. The government is also enhancing spending efficiency and implementing structural reforms to support economic growth. The government is also enhancing debt management capacity through technical assistance, creating a Fiscal Risks Unit, building buffers, and tightening credit risk assessment frameworks.

Ghana aims to diversify its economy by increasing non-commodity exports, attracting foreign investment, and developing domestic financial markets, through investments in human capital, entrepreneurship promotion, and support for small and medium enterprises.

Image source: Human capital

The government is working on a debt restructuring plan to address its approximately $30 billion external debt and has sought assistance from the International Monetary Fund (IMF) to stabilize the economy. The IMF's involvement is part of a broader strategy to regain access to international capital markets, but the reliance on domestic financing remains a critical aspect of Ghana's economic strategy as it navigates through this financial crisis

Role of Ghana's Structural Adjustment Policies in Managing Its Debt

Ghana's structural adjustment policies, implemented since the 1980s under IMF guidance, have had mixed results in managing its debt. Initially leading to macroeconomic improvements like increased GDP and a liberalized economy, public debt has grown rapidly, reaching unsustainable levels. As of 2024, Ghana's debt-to-GDP ratio is around 105%, indicating that the intended outcomes of SAPs have not been fully realized.

Ghana initiated a domestic debt restructuring program in late 2022, halting debt service payments, completed in September 2023, but reported a participation rate below 50-70%.

Critics argue that SAPs, which promote economic indicators, have negative social impacts like increased poverty and inequality, reduced public investment in essential services, and hindered long-term development due to their focus on austerity measures, while Ghana's reliance on external financing makes it vulnerable to global economic changes.

Image source: Investment

The situation regarding Ghana's reliance on domestic borrowing and monetary financing due to its loss of access to international capital markets continues into 2024. This is necessitating further restructuring and creditors' negotiations. The $3 billion IMF relief package aims to tackle these issues, but the effectiveness of SAPs in achieving long-term debt sustainability remains uncertain. 

Role of Ghana's Traditional Export Dependence Play in Its Debt Sustainability

Ghana's economy, heavily reliant on exports like gold, cocoa, and oil, is vulnerable to global commodity price fluctuations, causing unpredictable revenue streams and complicating fiscal planning and debt servicing, and its lack of diversification can lead to disproportionate effects.

Export earnings are crucial for servicing external debt, but declines in commodity prices or production can reduce earnings, increasing the risk of default. Reliance on traditional exports can lead to overinvestment, affecting other sectors and potentially improving debt sustainability.

Fiscal Discipline Measures Implemented By Ghana to Manage Its Public Debt

The government is implementing a revenue-based fiscal consolidation program to reduce debt, focusing on expanding the tax base, improving tax compliance, and strengthening revenue administration. Additionally, they are enhancing spending efficiency and implementing structural reforms to support economic growth.

Image source: Fiscal risk

Ghana is enhancing its debt management capacity by receiving technical assistance, creating a Fiscal Risks Unit within the Ministry of Finance, building buffers through sinking funds and escrow accounts, and implementing a tighter credit risk assessment framework for guarantees and on-lending to state-owned enterprises.

Ghana aims to diversify its economy by increasing non-commodity exports, attracting foreign investment, and developing domestic financial markets, through investments in human capital, entrepreneurship promotion, and support for small and medium enterprises.

Fiscal Discipline

Public Financial Management Act, 2016

The Public Financial Management Act, 2016 in Ghana enhances fiscal discipline by establishing a comprehensive framework for managing public finances, mandating the Public Debt Management Office to publish half-yearly public debt statistics.

The Act mandates the government to produce an annual report on public debt, detailing debt stock, inflows, and service, for evaluating debt sustainability and making informed borrowing decisions. It also requires the Ministry of Finance to prepare an annual budget approved by Parliament, ensuring fiscal discipline.

The Act facilitates public debt restructuring for sustainability by facilitating the issuance of new debt securities and restructuring existing debt. It mandates the government to provide accurate information on debt stock and debt services, fostering public trust and accountability in public finance management. The Act promotes fiscal consolidation by reducing the budget deficit and ensuring sustainable public debt through policies that increase revenue, reduce expenditures, and enhance public spending efficiency.

Fiscal Responsibility Act, 2018

The Fiscal Responsibility Act, 2018 (Act 982) is crucial in Ghana's public debt management. It establishes fiscal responsibility principles, guiding public finances and debt management. The Act sets fiscal rules and targets, including a ceiling on fiscal deficit and public debt as a percentage of GDP, to ensure debt sustainability and fiscal discipline.

Image source: Debt sustainability

The Act requires the Minister of Finance to submit fiscal responsibility statements to Parliament, promoting transparency and accountability in public debt management. It also requires the government to impose sanctions for non-compliance with fiscal rules, deterring fiscal indiscipline and potential unsustainable debt accumulation. The Act encourages fiscal transparency by requiring the publication of fiscal information and reports, enhancing public scrutiny and monitoring of government debt management practices.

Debt Exchange Programme

The Debt Exchange Programme (DDEP) is a Ghanaian financial initiative aimed at managing the country's significant debt burden by swapping existing government bonds with new ones and altering the terms of original agreements. The programme aims to reduce debt servicing costs and enhance public debt management while protecting the economy and improving the government's capacity to service its debts. Non-participating bondholders are honored as per the original agreements. The programme is a voluntary financial tool for Ghana's economic stability.

Potential Risks of Ghana's Debt Exchange Programme

Ghana's domestic debt exchange program is facing low participation rates, potentially below 50-70%, which is lower than typical debt restructuring programs. The government's unilateral approach and lack of engagement with creditors have strained creditor relations, making negotiations with external creditors more challenging due to potential debt distress questions.

Ghana's low participation in its domestic debt exchange program has weakened its IMF program completion timeline, potentially impacting confidence and macroeconomic stability. The government may need to accelerate restructuring over 40% of domestic public debt, causing additional financial system stress.

Image source: Macroeconomy

Ghana's debt exchange program could harm financial sectors like banks, pension funds, and insurance companies. Regulators are addressing risks through regulatory forbearance and stabilization funds. The government's aggressive program could undermine credibility and trust with creditors, posing challenges to future debt management.

Key Components of Ghana's "Ghana Beyond Aid" Agenda

This is an ambitious vision articulated by President Nana Addo Dankwa Akufo-Addo. It aims to transform Ghana into a self-reliant and prosperous nation, reducing its dependence on foreign aid.

The Ghana Beyond Aid initiative is a national agenda, involving all sectors of society to foster development, rather than a government-specific plan. The agenda emphasizes enhancing values, mindsets, and attitudes among citizens for sustainable development and successful program execution, focusing on the "software" aspect of development.

Image source: Ghana Beyond Aid

Ghana Beyond Aid aims to create a holistic investment climate by leveraging local resources, fostering partnerships with the private sector, and promoting both domestic and foreign investment. The agenda consists of six strategic pillars: agricultural modernization, industrialization, infrastructure development, private sector, and entrepreneurship development, social interventions, and domestic resource mobilization, focusing on self-sufficiency, local manufacturing, job creation, and social welfare programs.

The agenda aligns with the United Nations Sustainable Development Goals (SDGs), aiming to guarantee equal access to education, healthcare, and basic necessities for all citizens. The Ghana Beyond Aid agenda aims to transition Ghana from an aid-dependent economy to a self-reliant one, fostering a prosperous, inclusive, and resilient economy that empowers citizens and reduces reliance on external assistance.

Leveraging Factors to Reduce External Debt

Natural Resources

Ghana should diversify its economy by exporting manufactured goods, services, and agricultural products, along with primary commodities like gold, cocoa, and oil, to generate stable foreign exchange earnings and reduce commodity price volatility. Investing in human capital, such as education and healthcare, can boost productivity and economic resilience.

Strengthening domestic financial markets can boost investment and reduce external borrowing reliance through bond market development, financial inclusion improvement, and state-owned bank reform. Promoting entrepreneurship and supporting SMEs can create a dynamic private sector, drive job creation, and reduce external debt.

Image source: Entrepreneurship

Ghana can reduce external debt by managing its natural resource revenue sustainably, financing infrastructure projects, and diversifying the economy. The Petroleum Revenue Management Act can be used to establish a sinking fund for debt repayment. Prioritizing environmental stewardship can protect natural resources, maintain economic growth, and reduce external debt needs.

Ghana can improve debt sustainability and reduce its medium-term debt risk rating by obtaining IMF support for structural reforms and fiscal consolidation measures, thereby leveraging its natural resources to reduce external debt and achieve sustainable economic growth.

Technology

Digital technologies can boost productivity and competitiveness in various sectors, including manufacturing, quality assurance, inventory control, and decision-making. Increased use in agriculture, industry, and services can drive productivity gains and support economic diversification. Ghana's ICT sector offers significant business investment and innovation opportunities, with mobile technology providing a conducive environment for tech entrepreneurs.

Image source: Financial services

Digital financial services and payment systems in Ghana are reducing bank overhead costs, expanding financial instrument reach, and improving financial inclusion. FDI is boosting growth, productivity, and diversification through high-productivity services like ICT. Ghana's digital economy is valued at $1 billion and is expected to reach $5 billion by 2030. Digital technologies improve data collection and decision-making, enabling better policy decisions and targeted interventions for economic diversification.

Agricultural Sector

Ghana's crop-livestock farming systems can reduce risk, provide diverse food options, and enhance household food security. Policies and interventions promoting smallholder farmers' diversification can promote economic diversification. Investing in agro-processing facilities can increase agricultural value, tap domestic and regional markets, and drive economic diversification beyond primary commodity exports.

Ghana's cash crop exports, like cocoa, cashew, and shea butter, are highly sought after globally. Investments in cultivation, processing, and supply chain management can diversify the economy. Sustainable agriculture trends like organic farming and precision agriculture can also promote economic diversification. Adopting digital technologies can boost productivity, competitiveness, GDP, and job creation.

Image source: Precision agriculture

The study suggests that attracting foreign direct investment (FDI) in Ghana's agriculture sector, particularly in high-productivity services like ICT, can promote economic diversification and structural transformation while strengthening agricultural linkages with other sectors can create jobs.

Renewable Energy

Ghana can significantly reduce its greenhouse gas emissions and climate change contribution by transitioning to renewable energy sources like solar, wind, and hydropower. These sources have a lower environmental impact compared to fossil fuels, enhancing energy security and diversification, and reducing reliance on imported fossil fuels and global price fluctuations.

Image source: Renewable energy

Renewable energy, especially decentralized solar home systems, and mini-grids, can improve electricity access in remote and off-grid communities in Ghana, promoting universal energy access. This sector stimulates economic development and job creation and attracts foreign investment. It is crucial for Ghana's sustainable development goals, offering clean, affordable, and reliable energy. Diversifying the energy mix can also enhance the country's resilience to climate change impacts, such as droughts affecting hydropower generation.

Role of IMF in Ghana's Current Debt Management Strategy

Ghana has been implementing an IMF-supported program since 2022 to improve its medium-term debt risk rating to "moderate" and restore debt sustainability. The country is negotiating with the Official Creditor Committee under the G20's Common Framework to reach an agreement on external debt treatment.

The World Bank and IMF have provided technical assistance to Ghana in developing a Medium-Term Debt Management Strategy, assisting in evaluating borrowing strategies, and supporting fiscal consolidation and structural reforms to enhance debt sustainability. The IMF program closely monitors Ghana's debt management practices and fiscal policies to ensure alignment with program objectives.

What Issues Related to Specific Measures Has Ghana Agreed to With the IMF to Address Its Debt Distress?

Ghana's government is implementing fiscal consolidation measures to reduce the budget deficit and improve debt sustainability, including increased domestic revenue, streamlining of expenditures, and improved spending efficiency. The country plans to restructure its debt and negotiate with external creditors while enhancing exchange rate flexibility to control inflation.

Image source: Exchange rate

Ghana is implementing public financial management reforms to improve tax administration, expenditure control, and arrears management, while also boosting private sector investment, enhancing governance, and promoting green recovery through adaptation and mitigation agendas to improve the business environment.

Ghana has implemented a Medium-Term Debt Management Strategy (MTDS) to ensure debt sustainability, involving debt extension, new instruments, and refinancing risk management. The government is enhancing its debt management capacity through training and technical assistance from international organizations.

Relation Between Foreign Investment and Debt Issue of Ghana

Ghana's oil and gas export boom in the late 2010s led to excessive borrowing, but external debt and foreign direct investment boosted its economic growth. However, the country's economic crisis, characterized by record inflation and a declining currency, has led to foreign investors selling bonds, halting infrastructure projects, and discouraging future development funding due to high debt levels. Ghana has agreed to restructure $13 billion of its Eurobonds and $20 billion of its total $30 billion external debt.

Ghana's Decision to Freeze New Tax Waivers Affects Foreign Investment

Ghana's freeze on new tax waivers could limit the future benefits of tax incentives like exemptions, holidays, and reduced corporate tax rates, potentially deterring existing foreign investors who are currently enjoying these benefits and potentially deterring further investment by foreign firms if retroactively applied.

The removal of tax incentives in Ghana may prompt foreign investors to reassess their investment strategies, focusing on economic fundamentals like market size, infrastructure, and political stability, rather than relying heavily on tax breaks. The government's freeze on new tax waivers could potentially boost domestic revenue collection and fund infrastructure and development projects.

Image source: Tax break

Ghana needs to balance foreign investment with domestic revenue through a streamlined tax system, as overly generous incentives may not be sustainable, and the government may need to focus on other factors.

Success Stories in Ghana 

Ghana is implementing a revenue-based fiscal consolidation program to reduce debt, focusing on expanding the tax base, improving tax compliance, and strengthening revenue administration. The government is also enhancing debt management capacity through technical assistance, establishing a Fiscal Risks Unit, creating buffers, and implementing a tighter credit risk assessment framework for guarantees and state-owned enterprises.

Image source: Resilience goes a long way

Ghana is aiming to diversify its economy by increasing non-commodity exports, attracting foreign investment, and developing domestic financial markets. The Ministry of Food and Agriculture is promoting organic fertilizer production among farmers to reduce inorganic fertilizer costs and build resilient food systems. These strategies have helped manage public debt, improve fiscal discipline, and promote economic diversification.

Recommendations for Reducing Debt Burden

Here are some key ways Ghana can diversify its economy to reduce dependence on external debt:

Boost Non-Commodity Exports

Ghana should focus on diversifying its export base beyond primary commodities like gold, cocoa, and oil. Promoting exports of manufactured goods, services, and agricultural products can generate more stable foreign exchange earnings and reduce vulnerability to commodity price fluctuations.

Attract Foreign Direct Investment (FDI)

Attracting more FDI into non-resource sectors like manufacturing, agribusiness, and tourism can help drive economic diversification. This requires improving the business environment, investing in infrastructure, and providing targeted incentives for priority sectors.

Develop Domestic Financial Markets

Image source Bond market

Strengthening domestic financial markets can mobilize more domestic resources for investment and reduce reliance on external borrowing. Measures could include developing the bond market, improving financial inclusion, and reforming state-owned banks.

Invest in Human Capital

Investing in education, skills training, and healthcare can enhance productivity and competitiveness across sectors. This will make the economy more resilient and attractive for private investment.

Promote Entrepreneurship and SMEs

Supporting small and medium enterprises (SMEs) through access to finance, business development services, and innovation can foster a more dynamic private sector. This can drive job creation and economic diversification.

In summary, Ghana can reduce its debt dependence by pursuing export diversification, attracting FDI into new sectors, developing domestic financial markets, investing in human capital, and promoting entrepreneurship. A comprehensive strategy targeting both the supply and demand sides of the economy is needed.

Immediate Actions to Be Taken After Defaulting

To stabilize its economy after defaulting, Ghana can take several immediate actions.

The government should consider debt restructuring through negotiations with international creditors and implementing a domestic debt exchange program to restructure local debt and reduce servicing costs, similar to previous efforts. This could involve extending repayment periods, reducing interest rates, or negotiating haircuts on principal amounts.

A suggestion is to seek international assistance from the IMF and World Bank to stabilize the economy, restore investor confidence, and fund critical reforms. It also suggests appealing for emergency aid and grants from international donors to support critical sectors and social safety nets.

Image source: Central Bank

The government must implement fiscal reforms to rationalize public expenditure, improve efficiency in public sector spending, and enhance revenue collection through improved tax administration, broadening the tax base, and tackling tax evasion. The central bank could temporarily raise interest rates to stabilize the currency and support it, while strengthening foreign exchange reserves through export promotion and import substitution strategies is also recommended.

The government can plan to implement structural reforms to diversify the economy and improve the business environment. These reforms aim to reduce dependency on a few sectors and invest in agriculture, manufacturing, and services, fostering innovation and entrepreneurship.

The government can augment its implementation of targeted social protection programs to support vulnerable groups affected by the economic crisis, such as cash transfers, food aid, and subsidized healthcare, and launch job creation programs to reduce unemployment and stimulate economic activity in sectors with high labor absorption capacity.

The crisis management plan should emphasize transparency and communication, aiming to build trust and manage expectations with the public and international stakeholders. Strengthening anti-corruption measures will ensure efficient resource use and transparency, enhancing confidence in government actions.

By taking these immediate actions, Ghana can begin to stabilize its economy, restore investor confidence, and lay the groundwork for sustainable long-term inclusive growth.

Conclusion

Ghana's debt crisis highlights the challenges African countries face in managing public debt due to historical, structural, and political-economic factors. The country's economic subordination and inability to break free from the debt trap have been exacerbated by the collapse of developmentalism in the 1970s, the implementation of structural adjustment programs in the 1980s, and recent fiscal mistakes by the government.

The crisis is severe, affecting Ghana's economy, creditors, and sustainable development goals. Despite debt cancellations a decade ago, Ghana loses 30% of its government revenue in external debt payments annually. The government is borrowing more from institutions like the IMF at high interest rates to pay off previous lenders, bailing out speculators.

Ghana's high-interest loans are exacerbating its debt burden, causing a dependency on international financial assistance. This restricts the government's fiscal space and investment in critical sectors like healthcare, education, and infrastructure. To break this cycle and address structural factors, Ghana needs a comprehensive strategy including global and domestic economic and financial reforms.

The Ghanaian government needs to improve fiscal discipline, diversify its economy, and ensure productive loan use to address the country's debt crisis. While the central bank cannot fully tackle the issue through monetary policy, it can support economic stability. Stakeholders must work together to build a sustainable economic order, ensuring the public doesn't bear the full burden.

Ghana is facing a serious issue. Yet, there is a silver lining in every cloud. Collaborative and concerted efforts by the government, the institutions, and civil society can lead the country out of the woods. It can even show the path for other African nations to follow. It might take a few years before ordinary citizens can heave a sigh of relief. In the end, patience and perseverance will pay off, and Ghanaians will wake up to a new dawn.