Why Ghana Went From Hero to Zero for Investors
Ghana is learning the hard way why oil can be a blessing and a curse. The onset of commercial crude production helped turn the West African nation into one of the continent’s top investment destinations, but also prompted successive governments to borrow to the hilt. Skittish investors offloaded Ghana’s bonds and currency, the cedi, amid doubts over its ability to settle its debts. The concern proved to be well-founded: In December, the government caught bondholders by surprise by unilaterally suspending interest payments on its external debt ahead of restructuring talks aimed at pinning down a $3 billion loan from the International Monetary Fund.
The first sub-Saharan African nation to gain independence after colonial rule, Ghana has been a bastion of stability in a region plagued by civil unrest and coups. 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 vibrant parliament. The world’s second-biggest grower of cocoa and Africa’s No. 2 gold producer, Ghana began exporting oil in late 2010. The following year, gross domestic product leaped by almost 14%. The economy has expanded every year since then, albeit at a more modest pace, with the government’s embrace of a free-market system helping to lure foreign capital and financing.
2. So what went wrong?
The government abandoned fiscal discipline and opened the spending taps in anticipation of an oil windfall. But energy revenue wasn’t enough to cover a succession of expensive flagship projects, and it borrowed more to plug the gap. Overspending was particularly rife in election years. President Nana Akufo-Addo’s administration has scrapped fees for senior high school students. In 2021, the government spent $1 billion on refinancing loans owed by private power producers, a move that was intended to reduce the state’s electricity bills. A plan to strengthen a banking industry weakened by bad loans has cost more than 25 billion cedis ($1.7 billion), and an estimated 8 billion cedis more is needed to complete the process. Covid-19 dealt a further blow to the state’s already stretched finances. After selling eurobonds for each of the previous nine years, Ghana was shut out of international capital markets in 2022 as investors lost faith in its ability to service its loans. The government shunned an initiative that would have enabled it to suspend interest payments and vowed not to ask for further support from the IMF, before changing its tune in July 2022.
3. What precipitated the debt restructuring?
State debt ballooned to 467.4 billion cedis at the end of September, representing 75.9% of GDP, up from 68.3% five years earlier. When it could no longer tap international markets, the government resorted to taking out domestic loans, paying annual interest rates of almost 30%. The central bank stepped in to provide the government with funding after it risked defaulting on the local debt, but it plans to limit further support to stay within its legal lending threshold. Lawmakers want Finance Minister Ken Ofori-Atta to take the fall for the economic crisis and have called for his dismissal.
4. How have investors responded to the meltdown?
There’s been an exodus from the currency and bond markets. The cedi’s decline of more than 57% between January and late November 2022 made it the world’s worst performer. The premium investors demand to hold the country’s dollar bonds rather than US Treasuries exceeds 3,000 basis points, well above the 1,000 level that signals distress. Fitch Ratings downgraded its assessment of Ghanaian credit to four levels below investment grade in September, the third cut in 2022.
5. What are the authorities doing to address the situation?
In late October, Akufo-Addo dismissed speculation that an IMF funding deal could translate into losses for any of Ghana’s creditors, but his administration changed course a month later and said it would enter into restructuring negotiations. In addition to the planned debt haircut, the government was also pushing for a suspension of interest payments on foreign bonds for three years, according to Deputy Minister of Finance John Kumah. Domestic debt investors would be asked to exchange existing securities for new ones that may offer a zero coupon in the first year, 5% in the second and 10% in the third. The president has pledged to restore financial discipline by reducing total public debt to 55% of gross domestic product by 2028 and peg external debt-servicing costs to no more than 18% of annual revenue by that year. The Bank of Ghana 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 tame runaway inflation. Ghana’s vice president, Mahamudu Bawumia, announced that the government is considering using gold to buy oil products to stem demand for foreign exchange and support the cedi.
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