The paradox of a debt stock: are we borrowing our way to prosperity or poverty?

Daniel Amateye ANIM

The issue of high debt stock is a headache for most developing economies, more importantly, economies in sub-Saharan Africa. Interestingly, Ghana is no exception to the debt phenomenon. The critical question is whether or not economies within sub-Saharan Africa can develop without debt? That is, borrowing from bilateral partners and multi-lateral institutions such as the World Bank, IMF etc. as well as from the international capital markets.

Most economists wonder if it is possible for African economies to develop, largely by relying on domestic revenue mobilizations. In finance, the concept of debt is important due to its ability to assist institutions, corporate, countries to undertake investment projects now and payments are made at a later date.

In fact, in principle, borrowing is not a bad deal but using the debt prudently, that is, investing it in key sectors of the economy, with the propensity to anchor and trigger real GDP growth is more important. If it is not invested in sectors that will bring about ripple effect, then, meeting payment obligations becomes a challenge for the economy. It is quite clear that, most African economies are struggling with meeting repayment obligations as and when it falls due, and equally so, sustainability of ever-rising debt levels.  Interestingly, most of the economies have to sacrifice the infrastructure development projects at the expense of servicing high debts.

Some economic analysts were of the view that, Africa economies are not actually borrowing too much but, rather, they are indeed paying too much for debt. Whether African economies are borrowing too much or paying too much for debts, the big issue is that, the economies are struggling with debt servicing and sustainability. It is against this background that recently H.E Nana Addo Dankwa Akufo-Addo has called on the IMF and the bilateral partners to cancel the debt of African economies.

Could it be said that, most of the countries on the continent are heading towards another HIPC initiative? In fact, in 1996 the World Bank, IMF and other multilateral, bilateral and commercial creditors initiated the Heavily Indebted Poor Country (HIPC) Initiative and Multilateral Debt Relief Initiative. The HIPC initiative was actually put in place to cut down the poorest countries debt so as to enable them scale-up their poverty-reducing expenditure.

Indeed, as a result of the debt cancellation, the Ghana government external debt fell from US$6.6 billion in 2003 to US$2.3 billion in 2006 thereby leading to an improvement in education, health etc. (IMF, 2017). Some years down the line, we asking for another forgiveness. Is it that, African economies are not really applying the loans judiciously and prudently? Or the terms of the loans are not too favourable, thereby making repayment difficult?

In fact, an African Union report on the economic impact of the pandemic released in April, 2020 shows that the continent could lose up $500 billion and as a result, countries may be forced to borrow heavily to survive. This implies that more debts are likely to be accumulated by most economies on the continent. Currently, Mozambique is struggling with repaying its external debt, about $14 billion. The country’s debt-to-GDP ratio was around 130 % in 2020, from 100% in 2018. Economies like Angola, Cape Verde, Congo, Djibouti and Egypt all having a debt-to-GDP hovering over 100%. The possible effect of this phenomenon on such economies is that little fiscal space will be provided to adequately respond to the recovery agenda.

Casares (2015), stipulated that there is a correlation between the level of debt stock and economic growth. He further stated that low levels of indebtedness, that is, an increase in the share of foreign public debt to GDP can promote economic growth, and at high levels, indebtedness could harm economic growth. It is my considered view that, as much as debt could be used to stimulate economic growth, it can equally derail real GDP growth and development when not properly and judiciously utilized for the overall benefit of the economy.

Debt sustainability

Debt sustainability is key to the external debt management strategy. According to Omoruyi (2016), public debt whether domestic or external is sustainable where the government is solvent. To him, to be solvent means that, the present value of government disbursements including inherited debt amortization, interest payments etc. must not exceed the present value of future revenues. This implies that, a country’s primary balance should be able to cover its existing public debt. As much as an economy is better able to generate sufficient inflows to meet debt repayment obligations without sacrificing the overall growth of the economy, debt may be deemed beneficial to driving developmental projects.

State of Ghana’s debt stock

Ghana’s debt levels have risen in recent years. According to the IMF, the rise in the debt levels is largely due to one-off expenditure, a growing interest bill, and weak domestic revenue mobilization. In fact, the Joint World Bank-IMF Debt Sustainability Report, 2019 stated that, Ghana is at a high risk of external debt distress. The report further stated that Ghana’s external debt service continues to absorb a third of government revenue.

According to the 2021 budget statement and economic policy, Ghana total debt stock stood at GH¢291, 614.5 million, as at the end of the fiscal year, 2020, representing 76.1 percent of GDP. Out of the total debt stock, the domestic stock accounted for 51.4 percent whiles external debt accounted for 48.6 percent.

The budget statement further indicated that, as a percentage of GDP, the external and domestic debt represented 37.0 percent and 39.1 percent respectively.  In 2018, however, the public debt stood at GH¢173,068.7 million, representing 57.9 percent of GDP and in 2019, it stood at 62.4 percent. Per 2019 budget statement and economic policy, a large part of the 2018 debt additions resulted from the financial sector bailout programme initiated by the government. It is against this back that the government slapped 5 percent financial levy tax on the banks. It is my expectation that such a levy shall be applied prudently in order for the government to close the fiscal gap.

It is my considered view that, the issue of high debt levels will not go down within the shortest possible time. This is due to the fact that, Ghana’s debt stock between 2010-2020 is ever-increasing. This is shown in the diagram below. What is critical, therefore, is the ability of the managers of the economy to apply such funds in a manner that it will generate sufficient inflows so as to meet interest and principal payment obligations as and when they fall due.

In fact, the IMF in its April, 2020 Fiscal Monitor report indicated that Ghana’s debt stock is expected to hit 81.5 percent of GDP by the end of 2021. The Fund further predicted that Ghana’s debt to GDP ratio will increase to 83.2 percent for the fiscal year, 2022. Projections were further made into the fiscal years 2023, 2024, 2025 and 2026.

According to the IMF, by 2023, 2024, 2025, Ghana’s debt stock is expected to be 84.8 percent, 86.0 percent, and 86.6 percent respectively. In the fiscal year, 2026 it will be around 85.5 percent, that is, a marginal reduction compared to the 2025 projection. It is my expectation that government’s loan profiling strategy will actually ensure that we do not get to the level of IMF projections. We need to work out the equation very well so that, we do not suffocate the economy going forward.

Are we borrowing our way to prosperity or poverty?

Normally, debts are supposed to assist individuals, firms and government to increase productive capacity. However, if it is not prudently utilized, it could become a headache for the individual or institution involved. Anytime government borrow, it is the expectation of the citizens that the funds will be used to support economic activities in the country so that jobs can be created, and other opportunities created for the overall real GDP growth. Unfortunately, available data clearly shows that, most loans that are contracted in this part of our world are not really invested in the key sectors of the economy; which has the propensity to stimulate real economic growth.

Often times, such loans are used to offset maturing debt, leaving little for meaningful development projects. Corruption has been cited as one of the key and critical factors accounting for poor debt management and sustainability in Africa. I must admit that governments over the periods have been working very hard to improving the living standards of the citizens, but the fact is that, we have huge infrastructure gaps, housing gaps, low-income levels and high levels of poverty starring at us on a daily basis. It is against this background that the citizens are demanding more from the government.

It is the considered view of the writer that, the amount of money borrowed over the years does not correspond with the level of development in the country. There is the need, therefore, for the government to speedily beef-up the level of development. I perfectly understand that the pandemic has actually distorted the fundamentals of the economy, and government is now strategizing a recovery agenda.

Nevertheless, efforts must be made to expand the infrastructure base of the country. There is the urgent need to expand facilities in our schools in order to consolidate the Free SHS policy. The health facilities should be expanded to accommodate the current demand on the existing facilities.

Let’s expand our road network to minimize the frequent accidents and the eventual death associated with it. It is refreshing to state that, we are not really borrowing our way to poverty but certainly not on the trajectory of prosperity. The arrow is rather pointing towards poverty, and therefore, we need to tread cautiously to our appetite for more debt.


In conclusion, I will like to suggest that we beef-up domestic revenue mobilization, do value for money projects, find a way of minimizing corruption, and finally holding people accountable for their actions and inactions. Debt, if prudently used, can indeed help improve the living standards of the citizens. But with the current debt stock, let’s be cautious with the management of the economy.

>>>The writer is a Development Economist and Chartered Business Consultant. Daniel is the Chief Economist at the Policy Initiative for Economic Development. He also the Director of Research and Analysis, B&FT. He can be reached on email: [email protected]. Tel; 0244 476376/ 0201939350

Leave a Reply