Ghana’s debt crisis has become a pressing concern for the country’s economic stability, with the country’s external debt soaring by 117% between 2014 and 2023, from $13.9 billion to $30.2 billion.
However, these massive borrowings have not yielded corresponding economic benefits, raising concerns about fiscal governance and debt sustainability. A significant portion of Ghana’s debt is attributed to China, which has emerged as the country’s second-largest bilateral lender.
According to Mohammed Saani Osman, a Policy Analyst at the Africa Center for Energy Policy, the country’s infrastructure needs have played a significant role in driving this borrowing.
Between 2016 and 2023, China accounted for approximately 15% of Ghana’s total external loans, excluding multilateral agencies and Eurobonds.
Osman explained that following Ghana’s severe economic challenges in 2022, the government sought assistance from the IMF in 2023.
As part of the bailout conditions, Ghana was required to restructure its external debt, leading to the formation of the Official Creditor Committee (OCC), in which China was expected to participate.
However, negotiations with China dragged on for months, delaying the overall debt restructuring process.
“The kind of debt we held with China had implications on our debt sustainability as a country.
“Most of these contracts, particularly in the energy sector, transportation, and oil and gas infrastructure, were shrouded in opacity, making it difficult to restructure them under the G20 Common Framework.”
Mohammed Saani Osman, a Policy Analyst at the Africa Center for Energy Policy
One of the major criticisms raised by Osman and his team is the lack of transparency in the contracts between Ghana and China. According to their research, many of these agreements are not open to scrutiny, and the terms are often unfavorable.
“The opacity of these contracts, the kind of clauses that prevent Ghana from having discussions using the G20 Common Framework that is more preferable, led to the dragging of China in the formation of the OCC we intended to form.”
Mohammed Saani Osman, a Policy Analyst at the Africa Center for Energy Policy
In addition to the lack of transparency, Osman highlighted that the terms of China’s loans, including interest rates, additional fees, grace periods, and repayment schedules, are often more stringent compared to those from other bilateral lenders.
This has contributed to the country’s growing debt burden and raised questions about the long-term economic consequences of these agreements.
Resource-Backed Loans and Collateral Concerns
A particularly concerning aspect of Chinese lending to Ghana is the collateralization of some loans with the country’s natural resources.
Osman points to the Sino-Hydro deal, which involved bauxite reserves as collateral, as a prime example of this practice.
Other loans were similarly backed by future revenues from the oil and gas sector, raising concerns about the potential depletion of Ghana’s natural resource reserves to satisfy debt obligations.
“These types of agreements place significant strain on Ghana’s natural resources and could have long-term consequences for the country’s ability to generate revenue from these sectors in the future.”
Mohammed Saani Osman, a Policy Analyst at the Africa Center for Energy Policy
Search for Sustainable Alternatives
In light of these challenges, Osman and his team called for a rethinking of Ghana’s approach to infrastructure financing.
They recommended that the country seek alternative sources of funding that do not rely on unsustainable loans from China or other creditors with similar terms.
“We sought to highlight the impacts of these Chinese lending agreements that Ghana had with China.
“Also, a very key characteristic was the fact that Chinese lending had an impact on our natural resources.”
Mohammed Saani Osman, a Policy Analyst at the Africa Center for Energy Policy
The implications of Ghana’s debt situation extend beyond fiscal policy. The high cost of Chinese debt servicing puts additional pressure on the national budget, reducing funds available for critical social services, education, and healthcare.
“We need to find ways to fund infrastructure projects in Ghana without resorting to the unsustainable routes, such as taking loans from China with stringent terms, leading to long-term debt sustainability issues.”
Ghana’s rising debt crisis, particularly its dependence on Chinese loans, poses significant risks to its long-term economic stability.
While Chinese infrastructure financing has contributed to key projects, the opaque nature of contracts, high interest rates, and resource-backed arrangements have complicated Ghana’s debt sustainability efforts.
As the country navigates its debt restructuring under the IMF program, it is crucial for policymakers to adopt a more transparent and diversified borrowing strategy.
Sustainable fiscal policies and responsible debt management will be essential in ensuring long-term economic growth and financial stability for Ghana.
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