- Ghana, a top gold and cocoa exporter rich in oil and gas deposits, is struggling with a $55 billion debt burden.
- About 70 percent to 100 percent of the government revenue currently goes toward servicing the country’s debt.
- It is estimated that Ghana’s debt-to-GDP will reach 98.7 percent by the end of 2023.
Crisis-saddled Ghana is seeing about $15 billion in external debt relief by 2026, the International Monetary Fund has said even as the country pursues debt restructuring plan with investors. In December 2022, Ghana suspended payments on most of its foreign debts effectively defaulting as policymakers started restructuring plans as part of a bailout deal with the IMF.
Initial plan was an agreement to suspend service payments of its Eurobonds, commercial loans and most bilateral loans. Further, as an interim emergency measure, the government moved to engage its external creditors in what it thought was best in making the country’s sustainable.
Ghana’s debt-to-GDP ratio at 98.7 percent
While the country is a top gold and cocoa producer with oil and gas deposits, it is struggling with a debt burden like many Sub-Saharan Africa countries, currently at above $55 billion.
About 70 percent to 100 percent of the government revenue currently goes toward servicing the country’s debt. It is estimated that Ghana’s debt-to-GDP will reach 98.7 percent by end of 2023.
Annual inflation rate remained high at 41.2 percent in April 2023, despite being a drop from 45 percent in the prior month and a more than two-decade high of 54.1 percent in December.
Last year, Ghanaians took to the streets to protest the “economic crisis” in the country which forced the government to reverse its earlier position and seek help from the IMF.
Read also: Ghana sovereign debt crisis tip of African countries loan mess
The Executive Board of the IMF has finally approved a 36-month arrangement under the Extended Credit Facility (ECF) in an amount equivalent to around $3 billion, or 304 percent of quota.
The program is based on the government’s Post Covid-19 Program for Economic Growth (PC-PEG). The deal aims at restoring Ghana’s macroeconomic stability and debt sustainability. It includes wide-ranging reforms to build resilience and lay the foundation for stronger and more inclusive growth.
IMF’s decision will enable an immediate disbursement to Ghana about $600 million on May 19.
Large external shocks in recent years have exacerbated Ghana’s pre-existing fiscal and debt vulnerabilities. This has resulted in a loss of international market access and increasingly constrained domestic financing.
Plummeting domestic investor confidence
Decreasing international reserves, Cedi depreciation, rising inflation and plummeting domestic investor confidence, eventually triggered an acute crisis.
However, IMF notes that the authorities have taken bold steps to tackle these challenges, including by accelerating fiscal adjustment. The government has also launched a comprehensive debt restructuring to address severe financing constraints and the unsustainable public debt.
Securing timely debt restructuring agreements with external creditors will be essential for the successful implementation of the new ECF arrangement.
Key policies under the authorities’ program include large and frontloaded fiscal consolidation. This will bring public finances back on a sustainable path, complemented by efforts to protect the vulnerable.
The adjustment effort will be supported by ambitious set of structural reforms. The IMF is pushing for reforms in tax policy, revenue administration, and public financial management. Also in the pipeline are measures to address weaknesses in the energy and cocoa sectors.
According to IMF, tight monetary and flexible exchange rate policies will help bring inflation back to single digits. The country will also be set on a path to rebuild international reserves.
The program also has a strong focus on preserving financial stability and encouraging private investment and growth.
It is expected to help Ghana overcome immediate policy and financing challenges, including through its catalytic effect in mobilizing external financing from development partners and providing a framework for the successful completion of the ongoing debt restructuring.
Large external shocks
Following the Executive Board discussion on Ghana, IMF Managing Director Kristalina Georgieva said the combination of large external shocks and preexisting fiscal and debt vulnerabilities precipitated a deep economic and financial crisis in Ghana.
In response, the authorities have launched a comprehensive reform program, to be supported by the ECF-arrangement.
It is focused on restoring macroeconomic stability and debt sustainability. A set of wide-ranging reforms will build resilience and lay the foundation for stronger and more inclusive growth.
Capacity development and continued support by development partners would be critical for the successful implementation of the authorities’ program, Georgieva said during a briefing on Thursday.
“Fiscal consolidation is a core element of the program. A substantial and front-loaded fiscal adjustment has started with the 2023 budget. Enhanced revenue and streamlined expenditure will be combined with policies to protect vulnerable households. This would create room for higher social and development spending in the medium term,” Georgieva said.
Enhance domestic revenue mobilisation
With a view to fostering lasting fiscal discipline, the authorities are also advancing reforms to enhance domestic revenue mobilisation. Additionally, the reforms are set to strengthen public financial management, and address woes in the energy and cocoa sectors.
The government has also launched a comprehensive debt restructuring. This plan targets both domestic and external debt, and is aimed at placing debt on a sustainable path. Effective collaboration by all parties involved would be critical, IMF notes.
“Preserving financial sector stability is critical for the success of the program. Given the adverse impact of the domestic debt restructuring on balance sheets of financial institutions, the authorities will devise and implement a comprehensive strategy to rapidly rebuild financial institutions’ buffers and exit from temporary regulatory forbearance measures,” she said.
Monetary and exchange rate policies under the program will focus on reining in inflation and rebuilding foreign reserve buffers.
The Bank of Ghana is expected to continue tightening monetary policy to tackle inflation. At the moment, inflation is on the decline and it is projected to eliminate monetary financing of the budget.
The central bank will also enhance exchange rate flexibility and limit foreign exchange interventions to rebuild external buffers.
“An ambitious structural reform agenda is being put in place to reinvigorate private sector-led growth by improving the business environment, governance, and productivity,” Georgieva said.
Debt relief
The West African country is targeting $10.5 billion of external debt service relief between this year and 2026.
Meanwhile, hopes are pegged on the IMF support, starting with the $3 billion, three-year rescue loan. The loan is seen as a step towards pulling Ghana out of the worst economic crisis in a generation.
It is seeking to restructure $20 billion of its roughly $30 billion external debt, including about $13 billion of Eurobonds, under the Group of 20’s Common Framework platform.
Some analysts have stated that the current debt restructuring by the government may impact the debt numbers by the end of 2023, with most now remaining on a wait-and-see mode.
