Why is Ghana where it is now? How did we get here and why? Was our present situation caused by the rise in the rate of the almighty dollar? Did we borrow too much of it, swelling our debt to an unsustainable level? Did the lack of the Eurodollar bonds push Ghana off the cliff? Where do we go from here? Do we have a reliable strategy to climb out and avoid falling back off the cliff? My friend and financial advisor, Seth Asante, has been helping me find answers to these questions and understand how we have arrived at near bankruptcy.
The rapid downward slope began roughly a year ago when we went to the Eurobond market to raise dollars and were denied it. The ripple effect saw our country cascading into a deep financial crisis. What did we go there for in the first place and why? We went there to raise dollars to finance our budget deficit (i.e. when government planned expenditure exceeds tax receipts and grants). We needed the money to pay current interest and principal due on our dollar loans, thereby increasing the overall size of our debt. This is the road Ghana travels each year to fund our manifesto development. It is a major underlying cause of our current debt restructuring which has affected government bond holders and may even affect the very survival of some banks. You may disagree with me, but in reality next to God, we depend on the dollar for our very survival. Remember, the US dollar is the world’s reserve currency covering most financial transactions and Ghana as a developing country cannot survive without it; and we are seriously short of it.
So far, it appears there is no serious discussion about how we get more dollars apart from the IMF loan expectation. Apart from going to the IMF or seeking outright debt cancellation from the G20 or the Paris Club members, how else can we get more dollars ourselves? Our total public debt as at the end of September 2022 was reported as $55 billion (GHS 467.4 billion). Out of that $28.4 billion is external debt payable in dollars. The breakdown is as follows – $13.1 billion owed to Eurobond holders, $1.9 billion to Paris Club members, $1.7billion to China, $8.1 billion to multilateral organizations and $3.2 billion to commercial lenders. That, my friends, is really what is at the heart of our problems. By the way, it used to be a problem for China too over 30 years ago. Now they have so much dollars that they are the largest investor in US government bonds. They focused on a specific goal of becoming the world’s biggest manufacturer, selling their goods in dollars. Many years later, the result is there for all to see. No country can compete with the Chinese in many manufactured products currently. By the way, the Chinese copied Japan who had earlier decided that they were going to use the little they had and their know-how, to produce for export; meaning to get more dollars from the world market.
Why are we not discussing new strategies and opportunities for getting ourselves enough dollars? After all, isn’t that the very basis of our inflation as in constant rising prices? Isn’t the correlation between the cedi depreciation and increasing inflation clear to us? Isn’t the lack of dollars the tipping point of our problems now? Shouldn’t the focus of our attention be also on increasing our dollar earnings? Why is it that we earned $1.1 billion from the export of cocoa last year whilst our neighbor, Ivory Coast, earned two and a half times what we earned? How soon can we get more dollars from our exports and which exports could this be from? Can we get more dollars from our people outside who sent us remittances of $4.5 billion and $4.7 billion in 2021 and 2022 respectively according to the World Bank, far more than cocoa could give us? Shouldn’t we be sending more trained people who cannot find jobs here outside to increase our remittances target to $10 billion annually? Imagine if we can achieve that feat. No product or service in Ghana can bring in as much dollars in a short space of time. According to the World Bank, India received $87.7 billion worth of official remittances from its people abroad in 2021, and is expected to receive $100 billion in 2022, far in excess of our total GDP for the same year; from remittances only. Anyway, I will return to this subject of remittances on another occasion. For now, I would like to focus on the problem at hand which is the difficult financial situation we find ourselves in today.
Let me start from what we have been taught over the years and that is the fact that government bonds and treasury bills are risk free. If that were to be true, we would not be in the crisis that we are in today. Now we know that our government can also come close to default just like Argentina and Brazil, leading to the IMF’s intervention in their economies with $42 billion and $30 billion respectively in loans some years ago. It is happening here too and we are seeking only $3 billion. The notion that there is no risk if you invest in government bonds is plainly wrong. Nothing is really risk free. There is no free lunch anywhere; neither in financial nor debt markets. Maybe the risk free theory applies to the US and I guess that is understandable because after all, they print the almighty dollar and issue bonds in their own currency. But we Ghanaians cannot apply the same risk free investment theory. We use cedis here and only here. Since we cannot raise international bonds in cedis, there is a risk of default. This truism is yet to be accepted by local investors, and digested by financial stakeholders. Many local investors with full faith in government bonds are waking up to the truth.
All the Eurobonds we have been raising over the years to finance our budget deficits are in dollars and we are expected to pay back in dollars. All other international debts are also to be paid back in dollars. Can you imagine that? We are borrowing dollars that we cannot pay back unless we earn sufficient dollars. When can we finance our development on a balanced budget where we “cut our coat to fit our size”? Don’t get me wrong. Borrowing is fine as long as we can pay back, and as long as it is sustainable enough to withstand commodities, currency and interest rate market volatility. The cedi depreciated over 50% year-to-date by the end of November last year. Interest payments alone take over 70% of our revenues, leaving us with nothing to finance our development. Since independence (except for some brief periods), our cedi has been depreciating (losing value) against the dollar because there is always more demand for dollars than the supply of dollars (availability). Our whole economy depends on the almighty dollar. And we are not alone. Other African countries are in similar situations. Something is fundamentally wrong here and we must seize the opportunity to address it and correct it for the long term. We cannot and should not run back to the IMF every 3 years for a bailout because we have suddenly been overtaken by events.
We have just started a new year. Unless something artificial and unsustainable is done (as we did at the end of last year), the cedi will sooner rather than later begin to lose value against the dollar. Remember that in February and March, the demand for dollars will go up as the many foreign companies will need dollars to pay their shareholders. The informal economy will also need dollars to pay for all the foreign imports they made in the lead up to Christmas. We wake up to see fuel prices rising bi-weekly even when the world market price of crude oil is falling sometimes. Fuel price increases affect every product and service in Ghana, including inflation which also affects the cost of capital and the cost of living. In the last 15 years, we have simply borrowed dollars on international markets, mostly by issuing Eurobonds because our discovery of oil and gas and a cleaner balance sheet (gained after HIPC debt cancellation) gave us the collateral to do so. The trouble is, in 2022, the international lenders refused to lend us any more Eurodollars leaving us suddenly exposed. Suddenly we were unable to meet our dollar obligations.
The rating agencies also came out swinging and knocked our credit rating from B to below junk bonds grade (i.e. below investment grade) which convinced more investors to stay away from Ghana. Our current national revenue barely pays interest on the loans and public workers remuneration or emoluments. Where are we going to find the money? Looking back, could we have avoided the costly banking sector clean-up which has so far cost the nation $2.1 billion (or 21 billion cedis) and achieved the same objective we set ourselves through a different approach? Can we keep on spending more than we receive, without widening the tax net, or borrowing, or cutting our expenditure? Can we ever have the courage to live within our means with fiscal discipline whilst vigorously prosecuting corruption without fear or favour?
Our current dollar debt management should be tracked on a transparent basis. Our tax system is inefficient so the government has to borrow money to finance development projects promised in their manifesto during political campaigns. The recent volatility in the exchange rate has led to local price increases; price increases that never come down in absolute terms. And so workers are asking for more pay and have recently been granted a 30% increase. Thirty percent! Can we really afford that? It’s a vicious cycle. The private sector will be forced to increase pay also and will recoup this increase by increasing the prices of the goods and commodities they manufacture.
Meanwhile the need for dollars is growing daily and our cedi keeps depreciating. Our utility (electricity and water) charges are going up by the cedi depreciation as announced by the Public Utilities Regulatory Commission (PURC). We import “everything” into this country and so we need dollars to pay for them – drugs, textbooks, meat, fish, building materials, onions, garlic, etc. You name it. Without dollars, international airlines cannot come here. Without dollars, the ministry of foreign affairs cannot function overseas. What can we do about this as a country? If we had accumulated more than a year’s supply of dollars in our reserve to cover imports, interest payments, and transfers at our central bank, we would not be where we are today. However, with only 3 months of dollar supply by the Bank of Ghana, the country was severely impacted when the US Federal Reserve began adjusting their interest rates upwards from February 2022. A year later, the Fed is still raising interest rates on its federal funds. Foreign investors began withdrawing their money from Ghana to invest in the strong US dollar rather, leaving us “stranded.” In a recent appearance by the Bank of Ghana before a Parliamentary sub-committee, it was revealed that we currently have only $5 billion supply, for one and a half months of import cover. Beginning the year like this, does not bode well for dollar availability.
If we are going to borrow in dollars, do we really understand how that currency behaves given US Federal funds rate hikes? Maybe it is time for us to learn its behavior as quickly as possible so we can determine when to borrow and when to avoid Eurobonds. Why could we not see it coming when the actions of the Federal Reserve towards raising rates were trumpeted so loudly many months prior? The Federal funds rate is a key tool for guiding US monetary policy and impacts everything both in the US and outside, by dictating the cost of money in dollars in the US economy and world. How do we achieve a thorough understanding of how the dollar behaves especially towards Federal Reserve monetary policy and strategy to avoid an adverse impact to our debt sustainability? This is a challenge for our governments, politicians, lawyers, investors, and academia to digest for a solution.
Our need for dollars far outstrips the $1 billion dollars we are expecting from the IMF this year. The banks need dollars. All foreign manufacturers and service providers here also need dollars to send to their home companies. Our needs far exceed the amount of dollars on the market. We import “everything”. Just look around you. Even the cotton thread for weaving kente is imported, similar to our local fabric producers. We import toilet roll, toothpaste and toothpicks. We import clothes, wigs, shoes and sandals. We import plastics and fertilizer. The asphalt for building our roads is imported. Our farmers need dollars for their inputs. Our utilities need dollars for their inputs too. All vehicles here and their spare parts are imported with dollars. For some, school fees must be paid in dollars for children studying abroad.
The list goes on and on. Any wonder that the cedi keeps depreciating? It can never stop depreciating until we act decisively and in a timely fashion. The depreciation may slow down but in no time it will be back to the losing value trend. And then we will knock off some zeroes and pretend it has been sorted out. In no time, it will be back to $1 to 15 cedis and more. Forget about Russia and Ukraine. Let us focus on a strategy to earn enough dollars and then we can go ahead and buy all we want from the US, Europe, Japan, Russia, China, or Iceland, if that is what we want to do.
We are walking a very slippery slope as a country. Never before in the nation’s history has the cedi depreciated so much in such a short period and turned so volatile and erratic. All because of deficit financing and a debt level out of control. This is not the time for finger pointing but our governments are to blame, for failing to restructure the Ghanaian economy to produce more dollars. Since President Kufour’s time, governments have been borrowing dollars and our parliaments have been approving these dollar loans. Last year, when the issue of over borrowing came up, parliament should have put a lid on government borrowing. Do we have a law to prevent the government from borrowing so much and who monitors our debt level? Is it parliament or the Council of State or both? We should have put a cap on our debt level early enough, from the HIPC days when most of our debts were canceled. How else can we achieve debt sustainability? For example, we should have passed a law that limits our total debt to 50% of GDP after HIPC. That limit can only be raised for additional loans, if approved by at least 70% of the parliamentarians. The debate to raise the debt limit will involve some expenditures being cut by the government in order to secure approval from both sides of parliament as is happening in the US today. Otherwise, all loans above the debt limit ought to be fully project financed and not billed to the government’s balance sheet. Such a debt limit alone would have brought immense stability to the exchange rate between the cedi and the dollar. Just see how the US Treasury Secretary issued a warning recently about the danger of over borrowing, saying the US could be in default by June if their current deficit limit at $31.4 trillion is not raised by Congress. Their debt limit has been raised 22 times from 1997 to 2022 by Congress to avoid the US defaulting on its loans or bonds. The treasury secretary was sounding the alarm bells in good time and urging their Congress to act now. Why couldn’t we do the same here early enough?
Frankly, if we want more revenue, we should re-examine our taxation. Taxation is not delivering partly because people do not see what their money is being used for. Very few people pay direct taxes, and many get by paying nothing through ridiculous exemptions. Many tax eligible people are not paying taxes but enjoy public assets for free. What are people’s incomes and how can they be brought into the tax net? We have just created the Ghana card. How does it dovetail into revenue collection like the US does using individual social security numbers? We pay artisans and others in the informal sector but do they pay taxes on the income received? That is our biggest challenge. Many countries have done it and we should not be the exception. We can learn a lot from Ivory Coast, Senegal, Rwanda, and Kenya where they have made significant progress on domestic taxation. We should study them and find out how they did it. It is really about streamlining the system. Too much money is siphoned from the government. The current debt fallout is a disaster of significant proportion for the country. Kwame Pianim, an elder statesman, whose views I respect, reckons it will take us a generation to come back to normalcy. It’s an extraordinary situation. The sovereign is essentially in default. Not too long ago that was inconceivable. What is that going to mean going forward for ourselves and our children?
If anything good should come out of this, it should be that we have come to an understanding that the solution to our problem lies in increasing the dollar supply through productivity. To prevent our money from growing increasingly worthless, we must begin a serious non-partisan search for answers to what we must do as a country with our abundant natural resources and our abilities, to overcome this critical challenge of producing something needed by others, for sale to them in return for dollars from them. What should we produce or manufacture for export beyond what we are doing now? More on that another time.
In the coming months, Ghanaians should begin to focus on changing our consumption pattern. We must begin to focus on production from agriculture, manufacturing, minerals, and services, underpinned by our human resources and educational development. Although difficult, we must work to reduce corruption drastically too. More on reducing corruption at a later time. The dollars to be earned from productive sectors can change our current narrative and our lives. The reliance on government’s “risk free” bonds can also change, because new opportunities will emerge that will offer Ghanaians better productive ventures to invest their monies in for real dollar returns. Our current savings and investment strategy has hit the wall and will take a long time to adjust or settle, depending on how government bond holders fare in the current crisis. Maybe our current situation will turn some hands to new ventures with competitive advantage that can yield us more dollar returns, offering control over our destiny and a better understanding of the risks involved.
My final take is for the IMF to require us to change our whole fiscal structure for the long term as a condition precedent, because we cannot do it ourselves. There should be no further IMF bailout without requiring sufficient national fiscal policy adjustment. We should seize the opportunity to move from a country of limitless expenditure and deficit financing to one limited by law. This should not be difficult to do for a country in distress. History has shown us that regardless of the government, the parliament, and the 17 IMF bailouts so far, we are still in the woods. This should incentivize us to produce more for dollars towards our own survival, stability, and growth. It can also reduce our dependence on dollar capital inflows which can bring challenges and an abrupt halt to our economic growth during Federal Reserve dollar rate hikes. The capital inflows then become dollar capital outflows at a time we least expect it.
Folks, let us develop strategies to make more dollars than we need and be able to withstand debt and currency crises. Our aim is to have an appreciating cedi rather than always having a depreciating cedi. Let’s be bold as a country and correct the long standing structural mismatch between expenditures and revenues. Let’s invest in our natural endowments to create wealth in cedis and dollars. Let’s find everyone eligible to pay their fair share of taxes for national development by whatever means. And let us punish those who want to keep corruption alive. These accomplishments will reposition our nation on a better economic growth path. Finally, let us begin to think outside the box on how we can generate more dollars from domestic productivity. There are many options open to us but we can focus on a few and grow them ‘big time’.
Good luck Ghana.