The level of public debt is a closely observed metric in Ghana. For the past 30 years the country has travelled something of a debt roller coaster, recovering from one liquidity crunch only to be faced with another. The first dip came in the late 1990s, when the nation’s debt repayments as a proportion of revenue reached 20%, which was widely viewed as an unsustainable level. Ghana was not alone in this predicament: a debt crisis across the developing world was becoming a source of concern for creditors and debtors alike. The worsening scenario prompted the IMF and the World Bank to establish a pair of debt relief schemes: the Heavily Indebted Poor Countries Initiative, which Ghana joined in February 2002; and the Multilateral Debt Relief Initiative, which the country participated in after its creation in 2005. Between the two, a significant proportion of Ghana’s bilateral and multilateral debts were cancelled, as well as loans from the IMF, made before 2004, and obligations to the World Bank and African Development Bank, predating 2004 and 2003, respectively. As a result, the country’s external government debt fell from $6.6bn in 2003 to $2.3bn in 2006, and its repayment burden from 20% to 5% of revenue.
Ghana’s more solid financial footing, combined with an increase in the prices it was able to achieve on its commodity exports, beginning in the mid-2000s, meant that lenders from around the world were willing to extend credit to the country. Consequently, having cleared much of the external debt it had built up during the 1990s, the size of Ghana’s debt obligations began to rise again.
Between 2006 and 2013 the nation’s external debt grew at a faster rate than the economy, expanding from 10% of GDP in 2006 to 30% by 2013. As of March 2018 two months before the latest sovereign issuance, it remained at this elevated level, standing at 31.4% of GDP, according to the Ministry of Finance. Ghana’s 2018 sale of $2bn worth of dual-tranche eurobonds was the country’s seventh sovereign offering since 2007, and the relatively low yield of 7.6% for the 10-year notes and 8.6% for the 30-year tranche was seen as a success for the government.
However, during this period the government also borrowed heavily from the domestic market in a bid to meet its fiscal shortfalls: total domestic debt rose steadily from 17.2% of GDP in 2010 to 24.5% in June 2015, and 29.7% in March 2018. Gross public debt, meanwhile, stood at more than 61% of GDP.
In the view of many, including Ghana’s Institute of Fiscal Studies, a non-profit think tank, servicing this debt has become a structural rigidity in the budget that leaves little space for social and development spending commitments. One solution that is available to the government in the short term and endorsed by the IMF is to lengthen the average maturity of domestic debt by reducing the issuance of short-term domestic debt instruments. The government began this process in 2017, and it was met with success, thanks in large part to non-residents, who in 2018 held more domestic debt than the entire Ghanaian banking system.
With regard to its external debt burden, the government is using its eurobond issuances to refinance the risk of maturing eurobonds, improving the maturity structure of the existing debt portfolio. These actions are slowly reducing the cost of servicing Ghana’s public debt: the IMF projected that the country’s gross financing needs would decline from 23% of GDP in 2017 to 15% the following year. While this is a positive trajectory, potential developments such as exchange rate depreciation or a decline in export levels could knock Ghana’s debt management efforts off track. The long-term solution to the country’s public debt challenge, therefore, is a continuation of the fiscal reform process and a further diversification of economic activity away from a reliance on exports of volatile commodities.