As the debate on Ghana’s widening debt and its sustainability rages on, global debt burden retreated for the second year in a row, while Ghana’s debt stubbornly escalates, with many questioning President Nana Addo Dankwa Akufo-Addo’s commitment to lowering the country’s debt stock – the President who accumulates the most debt in the 4th republic.

Ghana’s debt is currently unsustainable, but the country aims to restore it to a moderate risk of debt distress by 2028, bringing the public debt-to-GDP ratio from 88.1% at the start of 2023 to 55% by 2028.

The back-of-the-envelope calculations suggest that this translates to a 40%-50% haircut on external debt, if there is not further restructuring of domestic debt.

That notwithstanding, commitment is what is lacking on the part of the managers of the economy as all warnings of excessive appetite for borrowing seems to fall on deaf ears.

Generally, government debt as a percent of GDP is used by investors to measure a country’s ability to make future payments on its debt, thus affecting the country’s borrowing costs and government bond yields.

In particular, Ghana has faced greater challenges in managing its debt vulnerabilities. The country spent a huge percent of tax revenues just to make interest payments, as the tax revenues remained stagnant while debt burdens have risen.

At this point, improving tax capacity and revenue mobilisation should be a key priority to restore fiscal sustainability – something proving a hard nut for the government to crack, given the numerous loopholes in the system.

An emerging economy like Ghana not only needs to reignite growth and secure a full recovery, but also must manage rising debt and other policy considerations.

First Step Toward Stabilising Ghana’s Debt

Meanwhile, the typical first step toward stabilising Ghana’s debt is to reduce new borrowing through fiscal consolidation, or to decrease the total outstanding through debt restructurings, of which the government chose the later.

Due to the large gap in how well markets function between advanced and developing economies like Ghana, there is considerable scope for the government to use market reforms as a policy lever to revitalise growth and reduce debt burdens on the economy.

Ghana’s public debt increased by a fifth in just four months, driven partly by the inclusion of short-term loans from the central bank to the state. Public debt, which excludes state-owned enterprises obligations, rose to 569.3 billion cedis ($49.7 billion) at the end of April, the Bank of Ghana said on its website. The figure was adjusted to include the central bank’s overdraft to the government, which was securitized in December 2022.

The debt figure as of December rose to 473.2 billion cedis after the adjustment, from an earlier estimate of 434.6 billion cedis, according to the central bank’s summary of economic and financial data. Obligations as a ratio of gross domestic product declined to 71.1% in April from 77.5% in December.

Meanwhile, the IMF projected that the country’s public debt would rise above $98 billion in 2023.

The rise in Ghana’s debt situation is happening at the point where the IMF in its report indicated that global debt declined by 10 percentage point from 248 percent to 258 percent of global gross domestic product (GDP) in 2022, as debt amounted to $235 trillion, underpinned by strong post-pandemic growth which lowered the Covid-19-induced spike in global debt.

The IMF report explained that the fall in global debt in the last two years which reversed about 2/3 of the 2020 surge in debt was driven by the rebound in economic activity, after a sharp contraction in the early stages of the pandemic, and massive inflation surprises.

Ghana, which defaulted on a eurobond payment earlier this year, is restructuring most of its debt to make it sustainable under a $3 billion International Monetary Fund program, which was approved in May.

The country completed the first part of a domestic debt exchange in February, with investors exchanging 87.8 billion cedis in obligations for new securities that paid as little as 8.35%, versus an average of 19% on the old notes.

Against this backdrop, the government needs to stay unwavering over the next few years in its commitment to preserving debt sustainability. The governments must also take urgent steps to help reduce debt vulnerabilities and reverse long-term debt trends.