Does Ghana's debt crisis suggest bigger trouble in Africa?

Ghana is currently drowning in public debt, a fact that has negatively impacted African capital markets. But does Ghana’s debt crisis suggest even bigger trouble in Africa, as some observers fear? This week, we explore Ghana's debt crisis and what it means for the continent as a whole.

Capital News Africa: From the trading floor – Week 2-2023

As 2022 drew to a close, Ghana’s debt crisis returned with a vengeance. Ghana’s government was forced to acknowledge that it could not meet most of its foreign debt payments. Those that the government has excluded from the moratorium are multilateral debt as well as short-term trade facilities.

Ghana’s government did not mince its words, saying: “This suspension is an interim emergency measure pending future agreements with all relevant creditors.”

Only a few days before possible default

The background to the crisis: Ghana’s debt obligations toward domestic and foreign creditors totals USD 48 billion. Last year, Ghana obtained an emergency loan from the International Monetary Fund (IMF) that, at USD 3 billion, was double what the African nation had asked for. While it is unknown what conditions the IMF set for the loan, the Washington-based institution usually demands painful economic reforms from the borrower.

On 16 December, Ghana was obliged to meet interest payments on debt denominated in foreign currency. The moratorium announced by the government means it has until 16 January to make those payments. If it does not, Ghana has technically defaulted on its debt obligations. That could be very bad news indeed for Africa’s capital markets.

Fear of an African debt crisis

Ghana’s troubles, along with sharply higher energy prices and the global economic tension, have prompted worries by foreign observers that the whole continent could plunge into a debt crisis. The observers point to the fact that higher interest rates in the US and Europe have lifted global borrowing costs, including those borne by African governments.

For example, Kenyan investment bank Cytonn Investments warns: “Debt sustainability has been a cause for concern within the Sub-Saharan Africa region.” Moreover, the Finance for Development Lab (FDL), which is funded by the Bill & Melinda Gates Foundation, declared in a study that global interest rates may reach a level that is too much for many African countries to bear. “Current costs of funding make debt service hard to sustain, with an expected peak in 2024/2025. If such conditions were to hold, a significant liquidity crisis would quickly turn into a widespread solvency crisis,” said FDL in the study, entitled The Coming Debt Crisis.

Another reason for concern is the fact that the World Bank and the IMF warned last September that eight countries in the sub-Saharan region were already in “debt distress.” This called into question their ability to honour their debt obligations. Another 14 countries were at high risk of debt distress, and 16 at moderate risk of debt distress, the two institutions said.

Self-made crisis in Ghana

Our own view is that such fears are overblown. This is because Ghana’s debt crisis is self-made and has nothing to do with supply chain disruptions, high inflation on the continent or the sharp rise in prices for energy and other natural resources. Africa’s economy has, so far, held up reasonably well.

The reasons for Ghana’s debt crisis have to do with domestic policy. It is admirable how Ghana has been able to build stable, democratic institutions that current president Nana Akufo-Addo completely supports. But the price for such stability has been domestic policy that is based on compromise and concessions that were made to avoid hard decisions.

Many African governments, including Ghana’s, also did not do enough to resist the temptation from international investment banks to borrow heavily in foreign currency. Indeed, repayment of bonds issued in EUR or USD could overwhelm many African governments.

More privatisations are needed

We personally expected this as these bonds were issued. For we noticed that far too little of the proceeds went to investments which, for example, would have generated income in USD. Now some African governments lack the relevant currency reserves to honour bond repayment and, hence, find themselves in a very difficult situation.

We believe that the African governments still have the time to take the necessary measures to avert a larger debt crisis. If wisely implemented, these reforms will strengthen the African economy. For example, African countries still own too many companies. Their privatization through the stock exchange would generate revenue for the states and strengthen African financial markets.