Ghana’s long road to a debt solution

The road out of Ghana’s economic crisis will be rocky, with an IMF-backed restructuring plan likely to be complemented by harsh austerity measures.

After the Ghanaian government reached agreement on a $3bn lending package with the International Monetary Fund on 12 December, the country’s financial markets rallied. The cedi, Ghana’s national currency, rebounded dramatically from 12.9/$ to 8.5/$. Meanwhile, sovereign bond spreads narrowed by nearly 200 basis points.

After an extended period of financial crisis, the emergency loan seemed inevitable and overdue to many economists. But the outlook for Ghana hadn’t always been so gloomy.

Long considered a darling of the Eurobond markets, Ghana benefited from decades of rising export revenues – principally gold, cocoa and oil. It has one of Africa’s most educated workforces and a strong democratic track record. Between 2000 and 2019, GDP expanded at an average annual rate of 6%. The current government has also been praised for its efforts to provide up to 70% of the population with national health insurance.

An ample inflow of investment lay partly behind this putative success. After Ghana’s debt was written down in the Heavily Indebted Poor Countries initiative (or HIPC, an early-2000s debt cancellation campaign backed by the IMF), private lending took off. Ghana issued its first Eurobond in 2007, and has returned to the market 16 times since then. By March 2022, one-quarter of Ghana’s public debt was owed to external commercial creditors.

Ghana’s long fall from grace

However, excessive foreign borrowing can expose countries to sudden shifts in risk perception. From 2014, headwinds triggered by the end of a commodity “super cycle” undermined Ghana’s balance of payments position. At roughly the same time, the government issued billions of dollars in bonds to support the country’s overleveraged financial system. Public spending then spiralled ahead of the 2018 elections.

Fiscal deficits persisted until 2020, before the impacts of Covid-19 hit Ghana’s economy. Sharp falls in export earnings and remittance inflows, coupled with emergency healthcare spending, raised the fiscal gap to an eye-watering 15.2% of GDP (or $4bn). After a brief reprieve in 2021, the situation deteriorated again in February of last year. Ghana, a net food importer, suffered from the food price spike triggered by the Russia-Ukraine conflict.

In response to war-induced inflation, the US Federal reserve raised interest rates by three percentage points between March and October, boosting the value of the dollar against developing country currencies. Over that period, Ghana’s cedi fell by more than 43% against the greenback, placing it bottom of the 148 currencies ranked by a Bloomberg currency tracker. Inflation, meanwhile, exceeded 40% by the fourth quarter of 2022.