Ghana, a West African nation known for its gold and cocoa production, is facing its worst economic crisis in a generation. The country’s public debt has reached unsustainable levels, forcing the government to seek external help and restructure its obligations.
In this article, we will explain the causes and consequences of Ghana’s debt crisis, the main features of the government’s debt restructuring plan, and the role of the International Monetary Fund (IMF) in providing financial support and policy advice.
What is Ghana’s debt crisis?
Ghana’s debt crisis is a situation where the government is unable to repay its existing debts to its lenders. The country’s public debt rose sharply in recent years due to several factors, including:
– The impact of the COVID-19 pandemic, which reduced economic activity and tax revenues, and increased health and social spending.
– The depreciation of the local currency, the Cedi, which increased the cost of servicing foreign-denominated debt.
– The high interest rates on domestic and external borrowing, which added to the debt burden.
– The weak performance of state-owned enterprises, especially in the energy and cocoa sectors, which required large subsidies and guarantees from the government.
– The lack of fiscal discipline and transparency, which led to overspending and accumulation of arrears.
As a result of these factors, Ghana’s public debt reached 79.3% of GDP by the end of 2022, up from 62.4% in 2019. The country’s debt service (the amount of money needed to pay interest and principal on existing debt) also increased significantly, reaching 57.5% of government revenue in 2022, up from 35.6% in 2019.
These high debt levels and debt service ratios made Ghana vulnerable to external shocks and market sentiment. The country lost access to international capital markets in 2022, as investors demanded higher risk premiums to lend to Ghana. The domestic financing options also became limited, as banks and other financial institutions became reluctant to lend to the government or demanded higher interest rates. The government resorted to borrowing from the central bank, which fueled inflation and eroded confidence in the Cedi.
The rising debt and inflation also had negative effects on Ghana’s economic growth and social development. The country’s real GDP growth slowed down from 6.5% in 2019 to -0.9% in 2020 and 1.8% in 2021. The poverty rate increased from 23.4% in 2019 to 25.7% in 2021. The unemployment rate rose from 4.5% in 2019 to 6.7% in 2021.
What is Ghana’s debt restructuring plan?
Ghana’s debt restructuring plan is a set of measures designed to reduce the country’s debt burden and restore its debt sustainability. The plan was announced by the government in December 2022 as part of its Post COVID-19 Program for Economic Growth (PC-PEG), which aims to revive the economy and lay the foundation for stronger and more inclusive growth.
The main components of the debt restructuring plan are:
– A domestic bond swap operation, where the government will exchange $10.5 billion worth of local bonds with new ones that have longer maturities and lower interest rates. This will reduce the pressure on domestic liquidity and lower the refinancing risk.
– A request for external debt service relief from official bilateral creditors (such as China, France, Germany, Japan, etc.), multilateral creditors (such as the World Bank, African Development Bank, etc.), and commercial creditors (such as bondholders). The government is seeking a total of $10.5 billion of external debt service relief from 2023 to 2026, which will free up fiscal space for growth-enhancing spending.
– A comprehensive reform program to strengthen fiscal management and transparency, enhance domestic revenue mobilization, rationalize public expenditure, improve public financial management, address weaknesses in state-owned enterprises, and tackle structural challenges in the energy and cocoa sectors.
The government expects that these measures will help reduce Ghana’s public debt-to-GDP ratio from 79.3% in 2022 to 60% by 2028. The country also aims to restore its risk of debt distress rating from “high” to “moderate” by 2028.
What is IMF’s role in Ghana’s debt restructuring?
The IMF is an international organization that provides financial assistance and policy advice to countries facing balance of payments problems or economic crises. The IMF has been involved in Ghana’s economic affairs since the country joined the organization in 1957.
The IMF has supported Ghana’s debt restructuring plan by approving a $3 billion loan under its Extended Credit Facility (ECF) program on May 17th, 2023. The ECF is a lending instrument that provides medium-term financial support to low-income countries with protracted balance of payments problems.
The IMF loan will be disbursed over three years, with an immediate payout of $600 million upon approval. The remaining amount will be subject to quarterly reviews based on the implementation of policy reforms agreed with the IMF staff.
The IMF loan will help Ghana achieve its macroeconomic objectives by:
– Providing balance of payments support and boosting international reserves.
– Reducing financing needs and creating fiscal space for priority spending.
– Enhancing credibility and confidence among domestic and external investors.
– Supporting structural reforms to improve governance and efficiency.
The IMF loan is also conditional on Ghana securing timely debt restructuring agreements with its external creditors. The IMF has urged all creditors to participate in Ghana’s debt operation on comparable terms and provide adequate relief consistent with international standards.
The IMF has also provided technical assistance and policy advice to Ghana on various issues related to its debt restructuring plan, such as:
– Developing a medium-term revenue strategy to increase tax collection and broaden the tax base.
– Strengthening public expenditure commitment controls and arrears management systems.
– Improving fiscal transparency and accountability through regular reporting and auditing.
– Reforming state-owned enterprises in the energy and cocoa sectors to reduce their losses and liabilities.
– Preserving financial stability and fostering private sector development through sound monetary policy and exchange rate flexibility.
Conclusion
Ghana is facing its worst economic crisis in a generation due to unsustainable debt levels and high inflation. The country has embarked on a comprehensive debt restructuring plan with the support of the IMF and other partners. The plan aims to restore macroeconomic stability and debt sustainability while protecting the vulnerable and promoting growth.
The success of Ghana’s debt restructuring plan depends on several factors, such as:
– The timely implementation of fiscal consolidation measures and structural reforms.
– The full participation of all external creditors in providing adequate relief.
– The continued support from development partners and donors.
– The resilience of the economy amid external shocks and uncertainties.
If implemented well, Ghana’s debt restructuring plan could pave a potential path out of its economic crisis and lay the foundation for a brighter future for its people.
