GHANA’S UNSUSTAINABLE DEBT (11): “From theoretical perspectives (crowding-out, debt hangover; and default effects)”. policy recommendations


The cost of finance for Eurobond is the first key risk factor. Internal analysis of the exchange rate risk should have been considered the government should have expressed the capacity to raise the resources for repayment on the debt from the additional commodity export revenue. The next key risk in the procurement of Eurobonds lied in debt sustainability. This is the risk associated with poor management of the proceeds of the Eurobonds. They ended up being invested in non-income generating social infrastructure to the extent that the government is unable to raise the necessary to repay the loan. Other than capital infrastructure developments have used part of the Eurobond proceeds to re-finance public debt. Eurobonds had been costly for various governments, as the high yields demanded by foreign investors meant high interest costs to governments. These Eurobonds had become attractive to African countries especially Ghanaian governments because investors buy them without pre-conditions unlike multilateral concessionary loans that come with policy adjustment conditionalities, governments, the governments had total discretion in how they used the borrowed funds. These funds were offered at high interest rates, high coupon payments and shorter debt maturities. This meant that governments have shorter period to use these costly funds and that attracted periodic interest. These had become unsustainable and have led to more fiscal strain on the budgets. Interest payments had been one of the highest expenditure items and remained the fastest growth expenditure in Ghana’s fiscal budgets over the past decade. This a common phenomenon is the Sub-Sahara Africa countries that have borrowed on the international capital markets over the past decade. For example, Kenya, Angola, Egypt and Ghana have been paying 20%, 25%, 33% and 47% of their collected tax revenues towards interest payments (Mutize, M. 2021).

Three, another factor that has contributed to the country’s rising debt is the continuous high fiscal deficits driven by unproductive public spending. According to Bawumia (2010), the global food and fuel price increases in 2007-2008 adversely impacted most Sub-Saharan African countries, including Ghana. In the context of these global shocks and the 2008 elections, public sector spending increased substantially, raising the fiscal deficit from 7.6% of GDP in 2006 to 14.5% of GDP in 2008, only to increase further to 14.5% of GDP in 2020 but declined slightly to 11.2% of GDP in 2021.  Contributing to the strong fiscal expansion were high energy-related subsidies, increased infrastructure investment, higher wages and salaries, and a rise in social mitigation expenditures to dampen the effects of the global price shocks. Over the past decade the government primary deficits have been arising thus increasing the burden of debt because the governments had little resources to service interest on public debt. Fiscal deficits had worsened not only because of the plunged in export revenues but also because of the need to increase social spending and safety nets over the period. In Ghana, the lack of fiscal discipline is identified as a cause of the ballooned public debt up. For example, Ghana has been accumulating relatively large primary fiscal deficits over the past two decades, amplified every time the country was approaching elections. According to various IMF Country reports recorded high budget deficit over the past decade, for example in 2007 was 7.8% of GDP, 14.5% of GDP in2008; 10.9% of GDP in 2011; 10.2% of GDP in 2012; 10.3% of GDP in 2013; 12% of GDP in 2014 and 9.3% of GDP in2016; 14.5% in2020 and 11.2% of GDP in 2021. Ghana’s continuous high fiscal deficit was driven by partly by unproductive public spending that was not efficient in supporting equitable development.  However, around the 2008, 2012, 2016 and 2020 elections, fiscal slippages and unduly spending led to deep holes in the budget and unfavorable debt issuances. For example, the fiscal slippage in 2008 was the result of government subsidies of utilities, election year wage and salary increase and increased capital investment from proceeds of Ghana’s sovereign bonds to deal with energy crisis (Bawumia, 2010)[1].

At root of Ghana’s fiscal deficits was out of control government spending, largely to pay salaries of an overgrown civil service (Adams,2015)[2]. Fiscal slippages were due to bad public finance management in Ghana. As a result of this weak fiscal discipline, decline in commodity prices, high investment needs and unproductive investments had put the Ghanaian public finances have been under serious pressure over the years. A major factor that has contributed the debt problem is the levels of fiscal deficits over the past decade, borrowing to finance the deficits and the terms of borrowing. Among all these factors the most important is probably the fiscal deficit as it drives the level of borrowing and even the terms that can be obtained for such borrowing.

Ghana opted for major development programs and highly expansionary fiscal policies during the oil findings in the late 2000s, acquiring external debt as spending increases outpaced the rise in tax receipts. These spending policies continued for some time after the post- collapse in commodity prices (cocoa, gold and oil). Ghana also used external borrowing to maintain consumption in the face of falling export earnings. The growing fiscal deficits also reduced the ability of governments to make debt-service payments as they led to declines in the growth of real national income, inflationary pressures, and depreciation of Cedi against major trading currencies.

Private savings, which could have been an alternative to foreign borrowing, were also discouraged by policies designed to keep domestic interest rates low. This resulted frequently in negative real interest rates and disintermediation in the financial sector. Past governments have not implemented any serious structural reforms to put the country on sound economic footing to include significant cuts in the largess and waste in government expenditures and corruption in public service in the areas of over-bloated procurements and road constructions systems. Political expediency had not allowed past governments to aggressively restructure and privatize some of the state-owned enterprises such as Cocoabod, Cocoa Processing Company, State Transport Corporation and others which contributed to public sector debt

Fourth, mismanagement of the economy has also contributed to the current debt crisis. For example, in 2008 according to Bawumia (2010) strong public spending growth with rapid credit expansion and rising oil import costs contributed to a widening of the current account deficit from 9.9% of GDP in 2006 to 19.3 of GDP in 2008. The overall balance of payments recorded a deficit of US $ 941 million compared with a surplus of US$413 million in 2007. The pass through from global commodity price shocks, combined with fiscal expansion of 14.5% of GDP resulted in headline inflation of 18.1% by the end of 2008. According to IMF (2019) on Ghana’s/IMF health checks of the economy, that on 04/08/2014, the Cedi had depreciated by 40%, inflation reached double digits and the Bank of Ghana only had around seven days’ worth of imports in net foreign exchange reserves equivalent to US $400 million. In the first of 2014, the fiscal deficit was almost exclusively financed by Bank of Ghana printing money for an amount equivalent to 22% of the previous year’s fiscal revenue. The fiscal expansion of 11.9% of the GDP in 2021 that has resulted headline inflation of 31.7% in July,2022 with the Cedi depreciation of 26.5% with the dwindling foreign reserves.

Fifth, deterioration of the public finances over the past two decades had contributed to the public debt up in Ghana has resulted from increased structural fiscal deficits. While in the period 2008 -2017, Ghana has recorded budget deficits of more than 5% of GDP. The government budget balance as a percentage of GDP declined from 8.6% of GDP in 2000 to 2.0% of GDP by 2005, before increasing to7.8% of GDP in 2007, 14.5% of GDP in 2008, 14.5% of GDP in 2020 and 11.9% of GDP in 2021. The increased fiscal deficits have three main reasons. First, on the expenditure side, large investment programs were executed without assessing the impact of increasing export receipts in the long term. Large public investment projects have triggered unsustainable public debt accumulation as most borrowing decisions were ill-considered.

Indeed, some public projects financed by loans closed at unfavorable terms has been a destabilizing factor for the country’s public finances. In addition, there were risks that projects had weak return on investment were chosen. Not in all cases did some investments actually led to an increase in export receipts. This was example in the case of Ghana in 2018 Eurobond allocation. These projects often foresee for example, construction of greenhouses and capacity building training centers and coastal protection.

Sixth, unprecedented borrowing in foreign currencies has been exposing Ghana to exchange rate risks over the past decade. Currency risk has been often underestimated. The cost of servicing a US$ denominated Eurobond might have looked cheaper than that of a debt issue in local market, but the national currency declined over the period the cost of foreign borrowing arose. Vulnerability to currency risk increased as the Ghanaian government was dependent on the exports of one or two (cocoa and gold) commodities for revenue and foreign exchange. Amidst increasing of external debt, is the depreciation of the Ghanaian Cedi against the US dollar has been a great concern for governments and other policy makers. The depreciation of the local currency results in more money to pay for the debt. The Cedi has depreciated against the US$ over 300% since 2008. Holding more external debts denominated in foreign currency exposed Ghana to currency fluctuations. In exchange rate depreciation of the Cedi against major trading currencies in 2014 led to increase of 10% of Ghana’s external debt to GDP ratio.

According to Ministry of Finance and Economic Planning Annual Debt Report (2018) the Cedi depreciated the US $ (2014; 31.3%; 2015; 15.7%; 2016; 9.7%; 2017; 4.9%; 2018; 12.9% in 2019; 25,6% in 2022) averaging 18% making the foreign currency debt became more burdensome. Beyond foreign exchange risk, there is a real risk that Ghana may become so dependent on external debt that they may not sufficiently develop the local debt market. This type of “structural risk” is high because the US$ denominated external debt is cheaper than local currency denominated domestic debt.  Ghana’s experience is a case in point. In January 2013, the government could pay about 4.3% on a 10-year borrowing in US$. However, when borrowing in Ghana Cedi interest rate was at least 23% on 3-month Treasury bills.

After inflation differentials are taken into account the difference between US$ and Ghana Cedi borrowing costs reaches 10.6% (and 5.4% taking into currency depreciation). And this created a vicious cycle as the debt becomes more difficult to service, the default risk rises, and foreign currency investors are then even more inclined to stay away, leading to more capital outflows and making it nearly impossible to refinance and service that debt thus speeding up the trip to default.

Seventh, many Sub –Saharan Africa countries including Ghana have not been innovative in generating domestic revenue with revenue / GDP ratios remaining constant and declining in some instance, and therefore continued to rely on external sources of funding which tends to be expensive. In this regard, Ghana is no exception to borrowing. The government’s efforts towards fiscal consolidation remained constrained by high public spending in the face of relatively weak domestic revenue mobilization, owing to high levels of tax exemptions and tax avoidance. For example, fiscal data from the Ministry of Finance and Economic Planning (2018) noted that tax exemptions in respect of import duties, import value added tax, import National Health Insurance Levy and domestic value added tax had grown from GHC 392 million (0.6% of GDP) in 2010 to GHC 2.6 billion (1.0% of GDP) in 2017 and further to GHC 4.66 billion (2.4% of GDP) in 2018. Quartey (2018) cited that the import tax exemptions as a major threat to domestic revenue mobilization. According to him, in 2018 alone, import exemptions increased to 33.6% of total revenue making up to GHC 4.2 billion.

Tax enforcement still remain a big challenge as many individuals and companies continue to benefit from various loopholes in the tax system. Its current lower middle-income economic status, makes it relevant for the country to continuously invest in the productive sectors of the economy to ensure sustained growth. Ghana has a very weak tax system and, as a result, the country does not generate enough tax revenues to fund its expenditures. Therefore, taxes are not considered a good option for funding budget deficits. Additionally, the informal sector of Ghana’s economy is excluded from the tax base of the country due to the lack of an accurate database of that sector, which makes it difficult for the tax system in Ghana to track their economic activities and tax them accordingly (Bagahwa and Naho, 1995)[3]. Lack of innovative ways of raising domestic resources to reduce Ghana’s dependence on borrowing to finance its investment needs. This has led to sovereign bonds and other non- concessional loans thereby driving up to its debt /GDP towards pre-HIPC levels.

Weak domestic revenue mobilization has become Ghana’s key fiscal challenge and risk, the root cause of fiscal imbalances, and the biggest single threat to the government’s development objectives. The low domestic revenue mobilization can be blamed on leakages at the revenue collection agencies as well as the lack of proper mechanism to formalize the informal sector of the economy. Recent work by the IFS (2015)[4] shows that Ghana’s domestic revenue/GDP ratio remains far below the levels of its sub-Saharan African peers, and the revenue gap has increased significantly in the past years.  Bopkin (2021) stated that the Ghana’s tax to GDP is said to be around 14.7% compared with a 19.1% in Africa, 22.8% in Latin America, even though the finance minister in the 2019 budget statement said that the country’s domestic revenue/GDP ratio averaged 20% in recent years, much less than the Sub-Saharan African countries average of 27% of GDP, suggesting that Ghana’s actual domestic revenue is far short of what the country’s economic potential and institutional development could generate.

If Ghana’s domestic revenue had performed poorly among its regional peers, the country could have not generated significantly more revenue, which could have been used to pay off its expenditure overruns, with extra funds to pay off some of its debts

There has been the usual call for successive governments to improve domestic resource mobilization through efficient tax collection system, reduction of tax exemption schemes, the automation of tax administration, and through reform of the public financial management system and stemming of capital flight. However, at the heart of the problem of tax collection in Ghana is the highly informal nature of the economy underpinned and supported by the predominance of cash transactions as a result of financial exclusion. Unfortunately, many developing countries including Ghana have not made the link between financial inclusions on the one hand and the difficulty of collecting taxes on the other. The government since 2017 has tried to formalize the economy through digitization of the addressing system of houses, the national identification numbers, tax identification system, the reduction of the cost of doing business and the leveling of playing field for domestic as well as foreign investors in terms of taxes, duty free waivers. According to IMF Country Assessment on Ghana (IMF,2019/19/ 367)[5] Tax to GDP ratio has been persistently been low compared to its peers in Sub-Sahara Africa. On average over last two decades, the tax ratio in Ghana has moved from 12.8% to 14.7% in 2021 of GDP below the Sub-Sahara Africa average of 16%.

The eighth factor that brought about the Ghanaian debt crisis was the many years of unfavorable terms of trade.  The widening external debt to current account receipts ratio has been a major feature over the past decade. Strong public spending growth combined with rapid credit expansion and rising oil import costs contributed to a widening of the external current account deficit from 9.9% of GDP in 2006 to 19.3% of GDP in 2008. While Ghana’s external indebtedness has increased in recent years, the current account receipts have decreased since 2011. According to IMF Country reports (2011-2017)[6] the current account recorded negative ratios of GDP (-9.3% in 2011; -11.7% in 2012; -11.9% in 2013; -9.6% in 2014; -8.3% in 2015; -7.2% in 2016 and -5.5% in 2017). The decline in the export receipts contributed significantly to debt crisis of the 2000s. The significant drop in export receipt from cocoa, gold and oil, combined with a strong US$ (i.e. the value of the dollar increased relative to the value of other currencies) and high global interest rates, depleted foreign exchange reserves that Ghana relied upon for international financial transactions.

Ghana consequently began to feel the strain of having to borrow to refinance the maturing 2008 Eurobond of US$ 750 million in 2019. The interest payment of the huge foreign debt has recently compounded depreciation of the cedi against the major trading currencies and massive capital flight. The persistent current account deficits not only depleted gross official foreign reserves but also involved an accumulation of external debts. The terms of trade have shifted against Ghana over past decades. Revenues from commodity taxation did not rise as fast, and previous governments used foreign borrowings to meet the cost of projects. When commodity prices declined, expenditures were not reduced commensurately, but governments resorted to additional borrowing to maintain expenditure levels. This policy would have been appropriate had the decline in the terms of trade been temporary but the deterioration of the terms of trade had persisted through 2000s.  As the country still dominantly consists of commodity-based economy, the drop-in receipts from cocoa, gold and oil has been mainly due to decline in commodity prices.  Oil discovery and volatility in commodity prices have been another cause of the Ghana’s debt problem. According to some analysts, Ghana’s post HIPC/MDRI debt crisis is a result of the gradual increase in borrowing off the back of the discovery of oil and volatility in world commodity prices. In early 2013, the price of gold fell significantly, as did the price of oil from the start of 2014. More money was therefore borrowed following the fall in the price of oil and other commodities to deal with the impact of the commodity price crash while the relative size of the debt also grew because of the fall in the value of the cedi against the dollar. The dependency on commodities was the central factor underlying a debt crisis which was common in the 2000s. Global commodity prices fell at the start of 2010 rapidly increasing the size of foreign debt payments which could only be paid out of foreign earnings such as exports.

As commodity producers across the world expanded production in order to pay debts, on the advice of the IMF and World Bank, commodity prices stayed low over 20 years. A combination of the recent fall in prices of commodities such as cocoa, gold and oil and the external loans not being used well enough to ensure they could be repaid has now pushed Ghana back into debt crisis. At the same time, the rapid economic growth in the 2010-2016 periods, driven by the coming on stream of oil production in the country has led to an increased willingness and desire of various lending institutions to lend to the country, with a corresponding willingness to borrow (Jones, 2016). Secondly, on the revenue side, the Ghana has been seriously affected by the decline or collapse of commodity prices on the international market over the past decade. Ghana as a major exporter of cocoa, gold and oil have experienced significant decrease in fiscal revenues, yet the lion’s share of export receipts did not build up sufficient buffers during the boom period to deal with shocks.

A continued and sustained decline in commodity prices jeopardized the debt sustainability position of this commodity dependent nation, since drop-in commodity prices reduce export earnings and therefore increase the debt service to export earnings ratio. Consequently, the country’s debt increased astronomically during the last decade. A combination of commodities price fall and loans not being used judiciously enough to ensure that they could be repaid also contributed to pushing the country back into debt crisis.

Ninth, one of the important factors that has contributed to the debt crisis over the past decade was the lack of stricter conditions on the application of funds borrowed on the international bond market. Ghana has tapped into international markets at an increasing pace since 2007. Ghana has issued sovereign bonds with issuances of considerable size. Low interest rates and appetite for riskier financial opportunities, together with the expected positive growth prospects had fueled high and steady demand for international investors. This has allowed Ghana to borrow large volumes in a short time span and diversified its investor base (Tyson,2015)[7]. However, sovereign bonds had exposed Ghana to exchange and interest rate risks, with far higher interest rates than the concessional borrowing from the Multilateral and Bilateral donors. Furthermore, international sovereign bonds that involved bullet payments had also created significant refinancing risks. International bond investors impose no conditions on how funds are spent by sovereign borrowers, unlike multilateral and bilateral lenders.

A bond prospectus may state that proceeds will be allocated to infrastructure development or debt rescheduling, but this is not always the case- and any mention of a use of funds is non-binding. Once they received of the proceeds from the Eurobond, they spend it how they like. According to Adams (2015) Ghana got into trouble in 2008 when they secured US$750 million that was earmarked for infrastructure but then mostly used for general budgetary purposes. International bond investors impose no conditions on how funds are spent by sovereign borrowers, unlike multilateral and bilateral lenders. A bond prospectus may state that the proceeds will be allocated to infrastructure development or debt rescheduling, but this is not always the case – and any mention of a use of funds is non-binding. “Once they’ve issued a Eurobond, and US$1bn or so rolls in, they can spend it how they like. That is what got Ghana into trouble,” says a Ghanaian debt specialist (Adams,2015)[8].


[1] Bawumia, M (2010) Monetary Policy and Financial Sector Reform in Africa : Ghana’s Experience. Oxford

[2] Adams, P. (2015) Africa Debt Rising. African Research Institute. Nairobi-Kenya

[3]. Bagahwa, M.D.S and Naho, A (1995) Estimating the Second Economy in Tanzania. World Bank Development Vol. 23 (8) pp 1387

[4] Institute for Fiscal Studies (2015). Ghana; Implications of the Rising Interest Costs to Government. Fiscal Alert No. 4. December 2015.

[5] IMF Country Assessment on Ghana (IMF,2019/19/ 367)[5] Tax to GDP ratio has been persistently been low compared to its peers in Sub-Sahara Africa.

[6] Various IMF Country Assessment reports on Ghana (2011-2017) Current Accounts Negative Ratios to GDP

[7] Tyson, J (2015) Sub-Saharan Africa International Sovereign Bonds; Part 1-Investors and Issuer Perspective; EPS PEAKS Report.

[8] Adams, P. (2015) Africa Debt Rising. African Research Institute. Nairobi-Kenya

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