1. Why was Ghana so popular with investors?
The first sub-Saharan African nation to gain independence after the colonial government of Ghana became the foundation of stability in a region plagued by insurgency and civil strife. Peaceful elections have been held regularly since the 1990s, power has changed hands between rival parties and presidents, and there is an independent judiciary and a shaking parliament. The world’s second largest producer of cocoa and Africa’s No. 2 producer of gold, Ghana began exporting oil in late 2010. The following year, gross domestic product jumped nearly 14%. The economy has expanded every year since, albeit more modestly, with the government’s embrace of a free market system helping to attract foreign capital and financing.
The government is opening fiscal discipline left to negotiate in anticipation of falling oil. But the industry’s revenue was not enough to cover the continued high cost of the flagship, and more was borrowed to plug the gap. Overspending has mostly been delayed in election years. President Nana Akufo-Addo’s administration scrapped the fees for senior high school students. In 2021, the government spent $1 billion in stripping money owed by private power producers, a move intended to reduce public electricity bills. The plan to strengthen the banking industry impaired by bad loans costs more than 25 billion cedis (1.7 billion), and more than 8 billion cedis is estimated to be needed to complete the process. Covid-19 has already extended a further impact on public finances. After selling Eurobonds for each of the last nine years, Ghana was excluded from the international capital market in 2022, as investors lost faith in its ability to service its loans. The government has avoided an initiative that would have allowed it to suspend interest payments and has vowed not to seek further aid from the IMF until a change of tune in July 2022.
3. What precipitated the debt?
Public debt stood at 467.4 billion cedis at the end of September, representing 75.9% of GDP, up from 68.3% five years earlier. When the international market could no longer sound, the government resorted to taking out domestic loans, paying an annual interest rate of almost 30%. The central bank has stepped in to provide government funding with the risk of local debt default, but plans to limit further aid to remain within its legal lending threshold. Finance lawyers want Minister Ken Ofori-Atta to take the financial fallout from the crisis and call for his resignation.
4. How did investors respond to the Meltdown?
It was the result of the currency and the bond market. A yield decline of more than 57% between January and November 2022 has made it the world’s worst performer. The premium investors demand to hold the country’s dollar bonds rather than US Treasuries surpassing more than 3,000 basis points, even above the 1,000 levels that signal distress. Fitch Ratings downgraded Ghanaian credit rating to four levels below investment grade in September, a third cut in 2022.
5. What do the authors do to address the situation?
As recently as October, Akufo-Addo dismissed speculation that much of the IMF’s funding could be transferred into losses for any of Ghana’s creditors, but his administration changed course a month later and said it would enter into the reconstruction business. In addition to the planned debt cuts, the government was also relying on the suspension of user payments on foreign bonds for three years, according to Deputy Finance Minister John Kumah. Household debt investors are asked to offer existing guarantees for new ones, which can offer nothing in the first year, 5% in the second and 10% in the third. The president pledged to restore fiscal discipline by reducing total public debt to 55% of gross domestic product by 2028 and capping external debt service costs at no more than 18% of annual income that year. The Bank of Ghana has 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 runaway inflation. The President of Ghana, Mahamudu Bawumia, has announced that the government is planning to use gold to buy oil products to support demand for foreign exchange and the cedi.
— With the help of Moses Mozart Dzawu, Yinka Ibukun and Paul Richardson.
More stories like this are available on flowerberg.com