The tough road ahead for Ghana’s next government: dealing with the debt burden

Ghana’s economy is in a precarious state, largely due to the mismanagement of financial and economic policies in recent years. When the current president’s term ends in December 2024 after a general election, the new government will face a major challenge: managing the country’s growing debt burden.

Current debt situation

Ghana’s public debt has skyrocketed, increasing by GH¢47.4 billion in just the first two months of 2024, bringing the total to GH¢658.6 billion. This staggering figure represents 62.7 percent of the country’s Gross Domestic Product (GDP) as of February 2024. Specifically, external debt stands at GH¢380 billion, equivalent to 36.1 percent of GDP. These figures, released by the Bank of Ghana in its May 2024 Economic and Financial Data Summary, underscore the severity of the fiscal crisis.

Debt Restructuring: A Step Forward or Just a Deferral?

An initial agreement (AIP) was reached to restructure a significant portion of Ghana’s $13.1 billion debt. The milestone was hailed as a significant step toward economic recovery, with analysts hailing it as a major achievement given the country’s fiscal constraints. The restructuring process, which began 18 months ago, was swift by international standards, reflecting the urgency of Ghana’s difficult financial situation.

But the AIP raises questions about its long-term sustainability. While it offers immediate debt relief and a basis for future growth, there are concerns that it may merely postpone the problem, putting the burden on future administrations.

The journey so far

Ghana’s path to debt restructuring has been fraught with challenges. The country declared default on its international debt in December 2022, ceasing payments to international creditors due to financial constraints. By March 2023, the government had engaged with international bondholders to negotiate a solution. This led to an agreement in principle with bilateral creditors in January 2024, followed by formal talks with international bondholders in March 2024.

The restructuring of domestic debt, totaling GH¢203 billion, together with a bilateral debt agreement covering GH¢5.4 billion deferred until 2026 and a restructuring of commercial debt of $13.1 billion, underscore the government’s comprehensive approach to addressing the fiscal crisis. However, these measures reflect the enormous burden borne by Ghanaians due to economic mismanagement. People have been faced with severe economic hardship, with no accountability from those responsible for the mismanagement. Despite the restructuring reportedly saving GH¢61 billion from domestic debt swaps, $2 billion from bilateral debt and $4.7 billion from commercial debt, the cost of these financial maneuvers has been disproportionately borne by citizens who continue to endure economic instability, uncertainty and a cost of living crisis.

Risks and uncertainties for the future

Despite these efforts, significant risks and uncertainties remain, especially given the current government’s track record of financial and economic management. With elections approaching, there is an increased risk of overspending, which could undermine fiscal discipline and stability. The new government will inherit a complex financial landscape that will require careful management to avoid further crises.

1. Market conditions and volatility: Fluctuating market conditions can impact the success of debt restructuring. The new government must navigate these uncertainties to ensure economic stability.

2. Legal and regulatory challenges: Potential legal disputes and regulatory hurdles could complicate the implementation of a debt restructuring agreement, requiring a solid legal framework and proactive management.

3. Stakeholder alignment and cooperation: The cooperation of all stakeholders, including international creditors and domestic entities, is crucial for the successful implementation of the restructuring plan.

4. External Economic Factors: Global economic conditions and commodity prices will have a significant impact on Ghana’s economic recovery trajectory. The new government must remain vigilant and adapt to these external factors.

Financial obligations and future loans

The restructured debt obligations that Ghana will face in the coming years are significant. Initial payments and interest bonds cover the period from 2024 to 2030, with 2024 alone requiring payments of $181 million. While this amount may seem manageable in isolation, the source of these funds remains a critical issue in an economy that is already strained.

Were it not for recent debt restructuring efforts, Ghana would face a staggering half a billion dollars in payments by 2025. That figure would be an insurmountable challenge for any administration, underscoring the country’s precarious financial situation.

Despite these restructuring efforts aimed at providing some breathing space, Ghana has continued to take on additional debt—at least $2.69 billion by 2022. This continued borrowing, while necessary to maintain state functions and public services, further exacerbates the country’s financial burden. Each new loan adds another layer of complexity to the already daunting task of managing the country’s debt.

This poses a critical challenge for the new government: how to effectively manage both the restructured debt and these new financial obligations without falling into a cycle of debt crises. This will require a delicate balance of fiscal discipline, innovative financial management and, perhaps most importantly, rebuilding trust in both international creditors and the Ghanaian public.

The government must not only find sustainable ways to meet these financial obligations, but also ensure that the economic policies implemented do not further undermine the country’s financial stability. This includes identifying new revenue streams, optimizing spending, and potentially renegotiating terms where possible to mitigate the risk of another debt restructuring scenario.

In addition, the broader economic environment must be supportive of growth. This includes not only fiscal and monetary policies but also structural reforms that can increase productivity and economic resilience. Addressing the root causes of the debt crisis – such as economic mismanagement, corruption and inefficiency – will be key to preventing a recurrence.

Waiting for something

As Ghana prepares for a new administration after 2024, the new government must adopt sound economic strategies to manage the debt burden and ensure sustainable growth. This includes leveraging international support, implementing fiscal discipline, and fostering economic resilience to prevent future financial crises.

The road ahead for Ghana is challenging, but with careful management and strategic planning, Ghana can overcome its current financial challenges and pave the way for a more stable and prosperous future.