Who is responsible for Ghana’s debt crisis?

Ghana has approached the G20 to restructure its external debts, the majority of which are held by private lenders. The process is necessary to unlock a $3 billion IMF bailout that will see severe austerity measures imposed on the Ghanaian people

January 24, 2023 by Tanupriya Singh
Ghana debt crisis
IMF Managing Director Kristalina Georgieva meets with Ghanaian President Nana Akufo-Addo (Photo: @KGeorgieva/Twitter)

On Wednesday, January 18, 26 civil society and aid organizations penned an open letter calling on international creditors to cancel Ghana’s debt. Ghana’s public debt stood at over 467 billion cedis ($46.7 billion) by the end of September, 2022, of which 42% was domestic debt. In December, Finance Minister Ken Ofori-Atta announced that interest payments on debt were taking up between 70 to 100% of the government’s revenue, and that the ratio of the country’s public debt to its GDP had exceeded 100%.

Based on the World Bank’s International Debt Statistics, 64% of Ghana’s scheduled foreign currency external debt service, which includes principal and interest amounts, between 2023 and 2029 is to private lenders. 20% of the debt is to multilateral institutions and 6% to other governments. Notably, while mainstream reporting on Ghana’s debt scenario tends to emphasize China as the country’s “biggest bilateral creditor,” only 10% of Accra’s external debt service is owed to Beijing. 

Approximately $13 billion of Ghana’s external debt is held in the form of Eurobonds by major asset management corporations including BlackRock, Abrdn, and Amundi (UK) Limited. “Ghana’s lenders, particularly private lenders, lent at high-interest rates because of the supposed risk of lending to Ghana,” the open letter read. 

“The interest rate on Ghana’s Eurobonds is between 7% and 11%. That risk has materialized… Given that they lent seeking high returns, it is only right that following these economic shocks, private lenders willingly accept losses and swiftly agree to significant debt cancellation for Ghana.” 

A weak debt relief infrastructure

In early December, the government announced a domestic debt exchange program under which existing bonds would be exchanged for new ones with a longer period of maturity. 

On December 19, the Ghanaian Finance Ministry announced that it was suspending debt service payments on the majority of its external debt, including commercial and bilateral loans. The country was expected to default on the first such payment, a $41 million interest payment due on a $1 billion Eurobond, on January 18.  

On January 16, the International Monetary Fund’s (IMF) managing director, Kristalina Georgieva, confirmed that Ghana was seeking to restructure its debt under the Common Framework initiative of the G20 countries, becoming the fourth country to do so following Chad, Ethiopia, and Zambia. 

The Common Framework was one of two debt treatment schemes announced by the G20 in 2020, the first being the Debt Service Suspension Initiative (DSSI), under which debt payments were to be temporarily suspended, giving poor countries space to respond to the COVID-19 pandemic.

Speaking to Peoples Dispatch, Tim Jones, the head of policy at Debt Justice, explained: “At the start, the DSSI was meant to lead to a suspension of debt to government lenders, to private lenders, and also determine how to do the same for multilateral institutions. However, multilateral institutions and private lenders both refused to take part.” 

“So in the end only government lenders suspended payments, which meant that only 23% of debt payments were actually suspended for countries which had applied for the scheme. However, even if the scheme had worked as intended, the problem was that it was just a debt suspension, with the debts still due to be paid years later.”

While the DSSI ended in 2021 with very limited success, the Common Framework had the opportunity to provide a broader debt cancellation, involving private creditors alongside bilateral lenders in the process to ensure that countries’ debts became sustainable. 

“But very little was done to outline the details of how that would work. While the G20 stated that government and private lenders would be included in the scheme, however, multilateral lenders were excluded,” Jones said. 

“They did not give any new mechanisms to countries to negotiate a reduction in their debt owed to private creditors, leaving it to the debtor governments to say ‘If you want debt cancellation from governments, you have to negotiate the same deal from private creditors.’ But they did not offer any tools to help indebted countries to do that.”

Chad became the first country to reach an agreement under the Common Framework in November 2022, after the process had been delayed and blocked for nearly two years by Swiss commodity trading and mining company Glencore, which held nearly the entirety of Chad’s debt to private creditors, itself comprising one-third of the country’s external debt. 

Even after the delays, the agreement did not yield any meaningful debt relief for Chad, merely a postponement of payments. 

On January 19, an official from the Paris Club told Reuters that all members of the G20 were in favor of restructuring Ghana’s debt, and that members of the Paris Club were ready to take the initial steps towards forming a creditor committee. 

It is possible that Ghana might enter these debt negotiations with a relatively strong position compared to Chad, given that, similar to Zambia, it has suspended its debt payments.

Advocacy groups have demanded that the G20 guarantee that Ghana will be “politically and financially supported to remain in default on any creditor which does not accept the necessary restructuring.” Importantly, they have highlighted that Ghana’s foreign currency bonds are governed by English law, which means that the UK parliament can take the necessary steps to provide legal safeguards for Ghana and rein in private lenders.  

As this process plays out at the international level, the necessity of debt cancellation for Ghana is underscored by the fact that living conditions for millions of people in the country have steadily worsened. 

Ghana goes to the IMF… again

By December 2022, Ghana’s consumer inflation had soared to 54.1%, the highest in over 20 years. According to figures published by the country’s statistics office on January 11, the prices of housing, electricity, water, and gas and other fuels rose by 82.3% year-on-year by the end of last year.

Meanwhile, the cedi, which had lost 54.2% of its value against the US dollar by November, was termed the year’s “worst performing currency.” These conditions sparked repeated protests in 2022, alongside trade unions struggles against a drastic decline in wages in real value terms.

In an interview with Peoples Dispatch, Kwesi Pratt Junior, the general secretary of the Socialist Movement of Ghana (SMG), said, “Why is Ghana’s economy in such dire straits? For one, while Ghana is heavily endowed with natural resources such as gold [being the 6th largest producer in the world], these resources are not owned by our people or exploited for our benefit.”

“The other part of the problem is that the US dollar has become the currency of preference in international trade. The US owns the dollar, its debt is in dollars, so all it has to do is reprint more dollars. Our [Ghana’s] debt is in dollars too, how are we supposed to pay?”

In July 2022, the government announced that it would approach the IMF for a bailout, in what would be Ghana’s 18th arrangement with the institution, in a stark departure from its earlier vocal opposition to seeking assistance from the IMF.  

Also read: Ghana’s unions and left reject bailout talks with the IMF as economic crisis spirals 

On December 12, the IMF announced that a staff-level agreement had been reached with Ghana’s government for a three-year, $3 billion dollar arrangement under an Extended Credit Facility (ECF). 

“The Ghanaian authorities have committed to a wide-ranging economic reform program,” the Fund said in a statement, adding that the “fiscal strategy relies on front loaded measures to increase domestic resource mobilization and streamline expenditure…”

Such language of “structural reforms” is indicative of one thing—more austerity, similar to Ghana’s previous engagements with the IMF and their disastrous impacts, and the signs of which are already visible in the country’s 2023 national budget. 

By the second quarter of 2022, Ghana’s unemployment rate stood at 13.9%. In a country where the civil service is the largest employer, the government has now implemented a hiring freeze in the public sector. Tax measures including a 2.5% increase in the Value Added Tax (VAT) rate, which disproportionately impacts poor people, have been announced. 

The government has also imposed a “cap on salary adjustment of State Owned Enterprises (SOEs) to be lower than negotiated base pay increase.” While the government and trade unions have reached an agreement to increase the salaries of all public servants by 30% in 2023, the increase will still not meet the rate of inflation. 

The Ghana Trades Union Congress has also accused the government of defaulting on its contributions to the pension schemes of over 600,000 public sector workers since February 2022. 

These anti-poor austerity measures are being implemented in pursuit of an IMF loan that is still pending approval—which is in turn conditional on the restructuring of Ghana’s debts to a level deemed sustainable. 

Watch: Kwesi Pratt Jr.: Nobody believes IMF deal will solve Ghana’s crisis

“The IMF is unfortunately central to how debt is managed in the global system. In theory, there is no structured process of dealing with a government debt crisis, there is no way for governments to declare bankruptcy,” Jones said. 

“So the IMF rules the system that exists in its place. When countries get into a debt crisis they turn to the Fund to seek more loans, and often the IMF grants these loans, which enables previous creditors to keep being paid while the IMF insists on austerity.” 

The Fund determines the contours of debt relief—how much debt can be restructured, what does this restructuring look like, whether it is in the form of simply moving payments into the future or actual debt cancellation—in a package, Jones added, which also includes deciding the extent of austerity. 

Rescuing Ghana from the imperialist debt trap 

Ghana’s debt crisis has been attributed to a continued dependence on commodity exports—rooted in colonialism—which are susceptible to volatile prices, as well as irresponsible lending and borrowing practices. The present debt crisis also shares key similarities with the debt crisis that had affected much of the Global South in the 1980s and 1990s. 

“The decade following the 2008 financial crisis saw a big increase in lending, the biggest driver of which are high interest loans from private lenders,” Jones stated. “A similar boom in lending had taken place in the 1970s. At the start of the 1980s, there were a series of economic shocks, commodity prices fell and interest rates went up. Even then much of the debt was owed to private lenders.”

However, in the 1980s and 1990s, the IMF and the World Bank lent more money, which allowed private lenders to keep being paid. As a result, “there was a transfer of debt from private lenders to multilateral institutions. This proved disastrous for countries who had to pay back these loans whilst implementing austerity.”

When some debt cancellation did take place in the 2000s, it was the multilateral creditors who were affected, and had to pay, instead of the original lenders. “This incentivized these lenders to keep acting recklessly, and is one of the reasons we have another crisis now.”

Ghana’s debt fell significantly between 2003 and 2006 following debt cancellation under the IMF and World Bank’s Heavily Indebted Poor Countries and Multilateral Debt Relief initiatives. Ghana witnessed major economic growth in the following years as the prices of gold and cocoa, two of the country’s main exports, began to increase. This also led to a rise in lending—between 2007 and 2015, Ghana had $18.2 billion in external loans and $8.7 billion in debt payments.

Between May 2007 and February 2015, the IMF and the World Bank assessed Ghana to be at moderate risk of debt distress. This classification meant that Ghana was eligible to receive 50% of the support from the World Bank in the form of grants and the other 50% as loans. However, analysis has revealed that 93% of the Bank’s funding to Ghana during this time was in the form of loans.  

In March 2015, Ghana was declared to be at high risk of debt distress, qualifying the country to access 100% of the support in the form of grants. However, the World Bank still agreed to give the country $1.16 billion in loans. 

Between 2013 and 2014, commodity prices fell, as did the value of the cedi. As a result, the relative size of Ghana’s external debt and debt payments increased. The government was forced to take on new debts in the form of bonds in 2013, 2014, and 2015, all with high interest rates ranging from 7.9% to 10.75%. 

The crisis was taking the shape of a new debt trap. Speculators now stand to rake in massive profits unless there is substantial debt cancellation for Ghana. 

In 1987, the president of Burkina Faso and Marxist Pan-Africanist revolutionary, Thomas Sankara, had raised a rallying call for a “united front against debt”—“debt is neo-colonialism,” he had stressed, “controlled and dominated by imperialism, debt is a skillfully managed reconquest of Africa.” 

35 years later, Sankara’s words still ring true, as Western private lenders continue to reap obscene profits off the very debt that is pushing people in countries such as Ghana further into poverty. 

“These debts are simply unpayable not just because of the unfair international economic order. They are also unpayable because a lot of these loans serve the foreign policy interests of imperialist powers,” Kwesi Pratt Junior told Peoples Dispatch

“The best example of this is Zaire (present day DRC) under Mobuto Sese Seko. Everybody knew that he was richer than his country, they knew that the loans that were being given to Zaire could not be repaid and yet they kept pumping in loans, because they wanted to hold up Zaire as a bastion against the expansion of communism.”

Pratt further added, “we are in the current condition because our economy is still modeled on colonialism. One of the best ways to understand this is to look at Ghana’s railway network—it always starts from areas of wealth, the mining areas of bauxite, gold, and diamonds, and ends up at the ports. These minerals do not move towards the centers of production, the factories, but they go to the ports to be exported out of the country.”

“This typifies the relationship between Ghana and the colonial metropolis,” he emphasized. “What does it mean when Ghana signs a foreign exchange retention agreement with mining companies allowing them to keep 98% of the total value of minerals exported from the country. In actuality, only about 2% of the value of what is mined in Ghana comes back to its economy. This has to change.”

For the SMG, the way out, not just for Ghana but for all of Africa, is through a fundamental restructuring of the economy and a return to the agenda of the independence movement—for the people to be able to determine their own political destiny and to own and use their natural resources for their own benefit. 

“We need to build an economy that responds directly to the needs of the people, to restructure it in a way that will make land available to the tillers, and that will ensure that people have access to services such as healthcare and education,” Pratt added.