Ghana is learning the hard way why oil can be a blessing and a curse. The onset of commercial crude production helped turn the West African nation into one of the continent’s top investment destinations, but also prompted successive governments to borrow to the hilt. Skittish investors have offloaded Ghana’s bonds and currency, the cedi, amid mounting concern over its ability to settle its debts. The tumbling exchange rate has caused inflation to soar. President Nana Akufo-Addo’s administration has appealed to the International Monetary Fund for an assistance package of as much as $3 billion, and insists debt holders won’t have to take a hit.
1. Why was Ghana so popular among investors?
The first sub-Saharan African nation to gain independence after colonial rule, Ghana has been a bastion of stability in a region plagued by civil unrest and coups. Peaceful elections have been held on a regular basis since the 1990s, power has changed hands between rival parties and presidents, and it has an independent judiciary and a vibrant parliament. The world’s second-biggest grower of cocoa and Africa’s No. 2 producer of gold, it began exporting oil in late 2010. The following year, gross domestic product leaped by almost 14%. The economy has expanded every year since then, albeit at a more modest pace, with the government’s embrace of a free-market system helping to lure foreign capital and financing.
2. So what went wrong?
The government abandoned fiscal discipline and opened the spending taps in anticipation of an oil windfall. But the revenue it earned was insufficient to cover a succession of expensive flagship programs and it borrowed more to plug funding gaps. Overspending was particularly rife in election years. Akufo-Addo’s administration has scrapped fees for senior high school students. In 2021, the government spent $1 billion on refinancing loans owed by private power producers, a move that was intended to reduce the state’s electricity bills. A plan to strengthen a banking industry that’s been weakened by bad loans has cost more than 25 billion cedis ($1.8 billion), and an estimated 8 billion cedis more is needed to complete the process. Covid-19 dealt a further blow to the state’s already stretched finances. After selling eurobonds for each of the previous nine years, Ghana was shut out of international capital markets in 2022 as investors lost faith in its ability to service its loans. The government shunned an initiative that would have enabled it to suspend interest payments, and vowed not to tap further support from the IMF, before changing its tune in July 2022.
3. How precarious are Ghana’s finances?
The country is on the verge of a fiscal crisis. Its 402.4 billion cedis of debt equated to 68% of gross domestic product at the end of July 2022, up from 62.5% five years earlier. When it could no longer tap international markets, the government resorted to taking out domestic loans, paying annual interest rates of almost 30%. The central bank stepped in to provide the government with funding after it risked defaulting on its local debt, but it plans to limit further support to stay within its legal lending threshold. The IMF has warned that the authorities will have to take remedial action, including restructuring its liabilities, to qualify for assistance should the state’s debt be deemed unsustainable.
4. How have investors responded to the meltdown?
There’s been an exodus from the currency and bond markets. The cedi’s decline of more than 55% in the first 10 months of 2022 made it the world’s worst performer. Its dollar-denominated bonds trade at yields of more than 10 percentage points above those of US Treasuries, a sign of distress.
5. What are the authorities doing to address the situation?
In late October, Akufo-Addo dismissed speculation that an IMF funding deal could translate into losses for any of Ghana’s debt holders. He’s pledged to restore financial discipline by reducing total public debt to 55% of gross domestic product by 2028 and peg external debt-servicing costs to no more than 18% of annual revenue by that year. Lawmakers want Finance Minister Ken Ofori-Atta to take the fall for the economic crisis and have called for his dismissal. The Bank of Ghana raised its key lending rate by 10 percentage points to 24.5% in the first 10 months of 2022 to support the currency and help tame inflation. The central bank also increased the cash reserves that banks are required to hold and began buying dollars from mining and oil companies operating in the country — moves that were aimed at bolstering depleting foreign reserves.
–With assistance from Moses Mozart Dzawu and Yinka Ibukun.
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