Ghana is in a debt crisis. Despite having had significant amounts of debt cancelled a decade ago, the country is losing around 30% of government revenue in external debt payments each year.
Such huge payments are only possible because Ghana has been able to take on more loans from institutions such as the International Monetary Fund (IMF), which are used to pay the interest on debts to previous lenders, whilst the overall size of the debt increases.
Ghana’s crisis is the result of a gradual increase in lending and borrowing off the back of the discovery of oil and high commodity prices.
More money was then borrowed following the fall in the price of oil and other commodities since 2013, to try to deal with the impact of the commodity price crash, whilst the relative size of the debt also grew because of the fall in the value of the Ghanaian currency, the cedi (GH¢), against the dollar ($).
The underlying causes of the return to a debt crisis are therefore the continued dependence on commodity exports, as well as borrowing and lending not being responsible enough, meaning that new debts do not generate sufficient revenue to enable them to be repaid.
Now, all the costs of the crisis are being born by the people of Ghana, and none by the lenders. This is unfair. Lenders should carry their share of the cost of any irresponsible lending, and of the change in circumstance caused by the fall in commodity prices.
Additional action is also needed to prevent a repeat of Ghana’s crisis, including changes on the part of the government and lenders to ensure that loans are well used, and that more of the revenue generated by the economy is turned into government revenue by taxation.
Commodity dependence
Ghana’s dependence on commodities dates to colonialism. The borders of the country now known as Ghana were established by the British colonists in the late-19th century.
The Europeans had first started coming to the ‘Gold Coast’ in the late-15th century to open alternative trade routes to the Sahara to access the region’s gold.
The Portuguese, Dutch, British, Germans, Swedes, and Danes all built or occupied castles and forts which were used as prisons for the slave trade.
The ending of the slave trade coincided with the industrial revolution, when European powers once again became more interested in Africa’s physical commodities – raw materials such as fossil fuels, metals, and cash crops – rather than in forcibly shipping its people across the Atlantic.
With the ‘scramble for Africa’ in the 19th century, the British extended their influence further inland, seeking direct control of gold and other resources. Whilst Ghana was the first colonised country to achieve independence in 1957, almost 60 years on, the country’s economy remains dependent on the export of just three primary commodities – gold, cocoa and now oil, which together make up over 80% of Ghana’s exports.
Debt crisis and debt cancellation
This dependence on commodities was the central factor underlying a debt crisis which was common to much of the global South in the 1980s and 1990s.
Global commodity prices fell at the start of the 1980s, rapidly increasing the size of foreign debt payments which could only be paid out of foreign earnings such as exports.
As commodity producers across the world expanded production to pay debts, on the advice of the IMF and World Bank, commodity prices stayed low for over 20 years.
From the mid-1990s the global Jubilee movement called for debt cancellation, which led to the creation and enhancement of two debt relief schemes run by the IMF and World Bank, the Heavily Indebted Poor Countries initiative, and Multilateral Debt Relief Initiative.
As a result of this debt cancellation, Ghana’s government external debt fell from $6.6 billion in 2003 to $2.3 billion in 2006. 3 Significant improvements in education and healthcare followed, due to money being saved and invested, alongside good government policies, enhancing basic service provision.
The proportion of children completing primary school was static at around 60–70% from 1980 to 2006, since when it has increased to almost 100%.
The proportion of births attended by a skilled health professional only increased from 44% to 47% between 1998 and 2006, but in the following eight years it increased to 74%.
Commodity and lending boom, and manufacturing decline
However, Ghana’s dependence on commodities continued, and as prices rose, this created more willingness for lenders to give loans off the back of a growing economy.
Gold and cocoa prices began to increase from the mid2000s, as part of a global boom in primary commodity prices heavily influenced by Chinese growth and demand, on top of continued high consumption in rich North American, European, and Asian economies. Furthermore, Ghana discovered oil, and began to produce and export it from 2011.
Collectively these changes led to a booming economy. Between 2006 and 2013 Ghana’s GDP per person grew by 44%.
However, over the same time the number of people living below the national poverty line only fell by 10%, a slower rate than in the previous seven years when growth had been far lower.
The reason was that much of the proceeds of growth went to those with the highest incomes. For every GH¢1 increase in income for the poorest 10%, the incomes of the richest 10% increased by more than GH¢9.
This rapid economic growth led to an increased willingness and desire of various institutions to lend to Ghana, with a corresponding willingness to borrow. Loans increased steadily from 2008 to 2011.
In total, between 2007 and 2015 there were $18.2 billion of external loans and $8.7 billion of debt payments, leaving $9.5 billion of the additional borrowing to be spent within Ghana.
There is little transparency on what the loans were used for, from both the government and lenders. The IMF figures on public capital formation show no relationship with the increase in lending, suggesting that whilst some loans could have been used for investment, the increase in lending did not lead to an increase in investment.
One of the more transparent lenders is the World Bank. Whilst they provide little information before loans are agreed – preventing civil society, media and politicians from holding the government and the World Bank to account – they do publish details during and after projects.
Our analysis of these reports shows that 25% of outstanding debt from Ghana to the World Bank is for projects where the World Bank judged its own performance to be less than satisfactory.
Moreover, between May 2007 and February 2015 Ghana was assessed by the IMF and World Bank to be at moderate risk of debt distress, and since March 2015 of high risk.
The World Bank is only meant to give half its support to moderate-risk countries as loans, and the other half as grants; to high-risk countries it is only meant to make grants.
Yet between May 2007 and February 2015, 93% of World Bank funding to Ghana was in the form of loans. And since March 2015 when the World Bank was meant to stop giving Ghana loans, it has agreed $1.16 billion of new loans or loan guarantees.
With high commodity prices and the beginning of oil production, export revenues increased rapidly from 2008 to 2012. Yet there is evidence that manufacturing was crowded out. As a share of GDP, manufacturing production halved from over 10% in 2006 to 5% by 2014.
Commodity price crash and the new debt trap
A combination of the recent fall in the price of commodities and the loans not being used well enough to ensure they could be repaid has now pushed Ghana back into debt crisis.
In early 2013 the price of gold fell significantly, as did the price of oil from the start of 2014. Since the start of 2013 the value of the cedi against the dollar has fallen by 50%.
This has caused the dollar-denominated size of Ghana’s economy to fall from $47.8 billion in 2013 to $36 billion in 2015.
Because external debts are owed in dollars or other foreign currencies, this has in turn increased the relative size of the debt and debt payments.
External debt has grown from $14.7 billion in 2013 to $21.1 billion in 2016 (an increase of 44%), yet because of the depreciation external debt has gone up from 30% of GDP in 2013 to an expected 56% in 2016 (an increase of 87%).
One response to these economic shocks has been for the government to borrow more money, most visibly through $1 billion of bond issues each in 2013, 2014 and 2015, all under English law.
This money has mainly been used to make external and domestic debt interest and principal payments, and to fund ongoing government costs, plugging the gap created by dollar revenue being lower than expected. Less visibly, there has also been significant borrowing directly from external financial institutions.
The interest rates on the new debts are high, rising from 7.9% for the 2013 bond issue to 10.75% for the October 2015 one. For the October 2015 bond issue, the World Bank once again broke its own rules by guaranteeing $400 million of payments if the Ghanaian government fails to make them.
The World Bank is not meant to give such guarantees for governments assessed as at high risk of debt distress, which Ghana had been for the previous seven months.
The high interest rate and guarantee mean that if the Ghanaian government were to pay the interest every year until 2024, then default on all other payments from 2025, including the principal, the bond speculators would still have made $90 million more than if they had lent to the US government.
This means that the speculators lent to Ghana believing that there was a high chance they would not be fully repaid. However, for the moment those speculators are being paid, in part because since April 2015 the IMF has been lending more money which is being used to meet debt payments, effectively bailing out previous lenders.
In return, the Ghanaian government must cut government spending and increase taxes, a process which is expected to intensify further after the December 2016 elections.
Under current plans, government spending per person (adjusted to account for inflation) will fall by 20% between 2012 and 2017.
The IMF estimates the Ghanaian government’s external debt payments in 2016 will be 29% of revenue, well above the 18–22% it normally regards as the upper limit of sustainability. Payments are expected to stay well above 20% of revenue until at least 2035.
This is only considered possible due to a combination of very optimistic expectations and requirements for large spending cuts and tax increases, the very things the IMF has been criticising the European Union for in the case of Greece.
By Tim Jones
This report is jointly published by the Integrated Social Development Centre Ghana, Jubilee Debt Campaign UK, SEND Ghana, VAZOBA Ghana, All-Afrikan Networking Community Link for International Development, Kilombo Ghana and Abibimman Foundation Ghana.
Full report here file:///Users/masahudu/Downloads/The-fall-and-rise-of-Ghanas-debt_10.16.pdf
