Ghana’s Debt Series: Where is the Money Coming From?

First Published in 2021

Ghana is in a debt crisis that will have the most consequential impact on the Ghanaian economy for the next decade or so. The country’s public debt stock currently stands at ¢304.6 billion in March 2021 according to the Bank of Ghana (BoG) Summary of Economic and Financial Data.

According to the IMF, Zambia and Congo Republic are the only two countries in Sub Saharan Africa that have unsustainable debt levels worse than Ghana.

On the average, debt of oil producing countries is estimated at 35.2% of GDP in 2021, whilst Sub Saharan Africa debt to GDP will be 47.2% of GDP. Ghana’s Debt to GDP was 78% in 2020.

Loan repayments for Ghana in 2020 was so high that provisional results for net external financing was just GH¢31.3 million, compared to a target of GH¢18 billion and the GH¢5 billion recorded in 2019.

In the first quarter of the year, interest payments on our debts plus government employees’ compensation alone exceeded domestic revenue by 24.4 per cent. This meant we needed an extra borrowing of GH¢11 billion to make it through the first quarter of the year.

In this Report, we will look at where the debt money is coming from; what the money is being used for; who the key players are and how we may get out of it.

The source of Ghana’s Debt is important because it helps explain why we still have oversubscribed debt offerings and why we have not seriously considered the alternatives we have to accumulating more debt. There are a number of sources for Ghana’s Debt but the most important ones are Multilateral Institutions, Investors, Banks & Financial Institutions and the Bank of Ghana.

Multilateral Institutions

A breakdown of the total external debt shows that multilateral debt, which is mainly contracted on concessional terms, amounted to US$8 billion or 33.5 percent of the total external debt stock as at end-December 2020. Out of this, the International Development Association (IDA) is the largest multilateral creditor with 55.8 percent. The IMF and the African Development Bank Group (AfDB) hold 25.4 percent and 14.8 percent, respectively.

Despite the concessionary nature of these loans which aid in Ghana’s Debt management strategy; these institutions have also added in entrenching the hold of Debt on the Ghanaian economy. For example in 2015, the World Bank created a new facility of which Ghana was the first beneficiary; and under it guaranteed $400 million of a $1 billion loan in case the Ghana government fails to pay.

This $1 billion loan had a high interest of 10.75%. The high interest rate and guarantee meant 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 according to the Global Jubilee Movement. This means that the Speculative Investors lent to Ghana believing that there was a high chance they would not be fully repaid.

The IMF has also been lending to Ghana mainly to be used to meet debt payments that have become due; effectively bailing out the speculative Investors that take up Ghana’s Debt despite the high risks of default. This encourages more risk taking by international investors in Ghana’s Debt ensuring the vicious cycle of loans and more loans to pay old loans that persist almost in perpetuity.

Speculative Investors

The bulk of external debt stock of US$12.6 billion (51.1 percent) was owed to commercial creditors as at end-December 2020. The commercial stock comprises non-concessional loans obtained from commercial window and the holders of Ghana Eurobonds issued on the International Capital Market (ICM).

Of the US$11.7 billion in Eurobonds issued by Ghana over the years, only US$1.5 billion in principal payment has been made as at the end of 2020. Yet, Ghana has been able to borrow even more in 2021 including issuing higher risk debt offerings such as a zero coupon bond. In the same vein, rating agencies such as Fitch and Moody’s have been reluctant to rate Ghana’s sovereign debts as junk though there are sufficient indicators to merit such a designation.

The just above junk rating has enabled Speculative Investors to keep lending irresponsibly to the country; seeking higher returns than what more credit worthy countries can offer while aware of the role of IMF’s lending to Ghana which basically guarantees their loans.

Banks and Financial Institutions

As at end-December 2020, the banking sector alone (including the Bank of Ghana) held 51.0 percent of the total domestic debt stock compared to 44.3 percent recorded in 2019. The holdings by the non-bank sector recorded was 30.2 percent while the share held by firms & institutions and individuals was 20.0 percent and 8.1 percent in 2020, respectively.

The negative impact of government borrowing from commercial banks on Ghana’s private sector development is well documented. The indifference of the banks to this unhealthy dependence of Ghana’s government on their depositor funds is more disturbing.

This also explains the high interest rates on our domestic debts due to structural and fixed costs in the banking industry that disables the government from quoting lower interest rates on local bills and bonds.

Bank of Ghana

The Bank of Ghana, just like any other commercial bank in Ghana, buys government domestic securities, with GH¢33.6 billion in total purchases in 2020. This is separate from BOG’s direct financing of government’s budget which for a couple of years (since 2016) has been zero under the IMF Extended Credit Facility (ECF) Program.

This hiatus was however, broken in 2020 as the BOG extended GH¢10 billion to government to assist with COVID 19 expenses. This puts the BOG back front and center as a major financier of government’s debt and compromises the independence of the BOG, further raising alarms of even more unrestricted borrowing by government.

Ghana’s Debt is not sustainable. It is having an impact today on government spending on important areas such as health, education, energy and government services. It will result in the next generation facing worse problems in these sectors than we have now as a country. It is tying the hands of future generations to determine what this country will be as they will live and work simply to service the debts of this generation. This is wrong and unacceptable and we must do something about it today.

The institutions that are complicit in providing these unsustainable levels of Debt to this country must be held to account by the many number of Ghanaians who will continue to suffer the consequences of their irresponsible actions.