Will Ghana find a way out the debt trap? – GIS Reports

Ghana, one of Africa’s most democratic and fastest-growing states, has been backsliding into turmoil caused by its external debt and the rising costs of living.

With a stable and functioning democracy in place since the 1990s and record-high economic growth rates in the 2000s, Ghana is often cited as an example of political and economic success. However, amid the risk of debt default only prevented by an International Monetary Fund (IMF) loan, with the national currency among the region’s worst performers and inflation spiking to 40 percent, angry popular protests have begun. 

While Ghana has faced situations of unsustainable debt before (it is the 17th time since independence that the country has sought IMF relief), and there is a strong tradition of civic activism and mobilization among students and unions, this current wave of protests may signal a more profound malaise for which there is no easy cure. 

A vicious cycle

In the late 2010s, Ghana was a rising star despite shocks caused by the commodities crash. One of the “African lions,” it was among the world’s fastest-growing countries in 2019. Its economy was diversifying, and income levels were growing while poverty decreased. 

Undoubtedly, the roots of Ghana’s economic crisis today precede 2020, as cyclical shocks exposed its dependency on cocoa and gold exports and on external financing. But more recently, the Ghanaian economy fell victim to the costs of the dramatic measures imposed during the Covid-19 pandemic. As in other countries around the world, public debt has ballooned, reaching unsustainable levels. That, combined with anemic growth, inflation and unemployment is eating into gains made during the previous period. 

Ghana was forced to seek, once again, help from the IMF in 2023. Its negotiated $3 billion relief package demands that the country restore macroeconomic stability. 

Ghana also shows the failure of the IMF’s 1996 Heavily Indebted Poor Countries (HIPC) Initiative, which was designed “to ensure that no poor country faces an unmanageable debt burden.” Ghana joined the HIPC, but its debt has been expanding since 2006. Today, it stands at around 105 percent of gross domestic product (GDP), placing the country among the most indebted in Africa. Shrinking foreign currency reserves and about 70 percent of government revenue devoted to interest payments have combined for an unsustainable situation. Ghana was forced to seek, once again, help from the IMF in 2023. Its negotiated $3 billion relief package demands that the country restructure its public debt.

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Facts & figures

Ghana government debt to GDP

Inflation, the elimination of fuel and electricity subsidies, rising income taxes and the introduction of new levies on cigarettes, sweet drinks, mobile money transactions and a “Covid-19 recovery contribution” surcharge are fueling discontent among the working poor and the middle class. To tackle debt sustainability, the government ventured to reduce Ghana’s debt-to-GDP ratio from 105 percent to 55 percent by end-2028. It hopes to meet this seemingly improbable target by boosting revenue (which includes increasing the tax burden) and cutting public spending drastically.

Problem of leadership quality returns

Ghana has long been regarded an example of a thriving Western-style, multi-party democracy. Indeed, since it transitioned to democracy in the 1990s, the country has featured regular, free and fair elections, freedom of expression and a robust civil society. 

Unlike many African regimes with personalized leadership or hegemonic parties, power in Ghana has alternated between the (now ruling) New Patriotic Party (NPP) and the National Democratic Congress (NDC). The pluralistic civil society and strong institutions, including a constitution that establishes political rights and civil liberties, are among the pillars of the country’s democratic superstructure. 

However, time and again, democracy proves to be a fragile endeavor. Ghana’s President Nana Akufo-Addo, a member of the NPP, has served since 2017. Elected on the promise of crushing corruption, he secured a second term in 2020, but the opposition rejected the results and ensuing violence broke the cycle of nearly three decades of electoral stability. 

Since that time, government members have been involved in corruption scandals, including the “Sputnik deal” (the purchase of Covid-19 vaccines from Russia) and the “contracts for sale” case, which led to the trial of the chief executive of the public procurement authority. Recently, the minister for sanitation and water resources was ousted and detained after it became known that members of her house staff had stolen more than $1 million in cash she had stashed in her bedroom. 

Economic turmoil in Ghana after years of record-high growth is also attributable to the unending expansion of the public sector.

This activity, for the most part, is taking place inside the bubble of the country’s ruling establishment. And as protesters denounce perceived “moral decay” of the political system, there are signs that in Ghana, as elsewhere on the continent, a deepening disconnect has emerged between the agendas of legacy political parties and the aspirations of the generations born and raised after independence. When parties’ role as gatekeepers of the political system – that is, filtering, absorbing and responding to citizens’ demands – weakens, instability and disruption likely follow.

Economic turmoil in Ghana after years of record-high growth is also attributable to the unending expansion of the public sector – a trend hardly unique to Ghana. The pandemic-related shutdowns also have played a role. Whereas, due to its youthful demographic profile, Covid-19 was not a significant health threat in Ghana, the economic costs of pandemic mitigation efforts have been severe. The 2020-2021 disruption is going to have a long-lasting, harmful impact on many Ghanaians’ lives. 

Ghana’s travails also expose the failure of the debt-burden moderation model in place over recent decades. Despite high growth rates, its economy, like other economies on the continent, has remained structurally dependent on external borrowing. This setup is unsustainable. Alarmingly, in a world where multilateralism is in crisis, reaching agreements with an increasingly diverse pool of creditors becomes more challenging.

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