A perfect storm: debt crisis looms for Ghana, other emerging economies in Africa
Ghana is a classic case of emerging economies in Africa and other parts of the world who have been caught in a perfect storm and are struggling to service their foreign currency denominated loans owing to a strengthening US dollar, rising global interest rates and that is made worse by their excessive borrowing.
Ghana is in the throes of the worst sovereign debt crisis since 2000 but its debacle is only one episode in a series of other similar cases among emerging African markets and low-income countries. In 2000, Ghana was elected to participate in the IMF/World Bank HIPC initiative and had US$ 4 billion of its sovereign debts forgiven. In 2021, the West African nation issued a US$ 3 billion Eurobond and is now in talks for financial assistance with its sovereign debt load in 2022. While Ghana ironically is a darling of the West in terms of foreign direct investment, its debt levels have breached what multilateral institutions consider to be sustainable. A painful irony is that Ghana refused the offer to renegotiate the terms of its debts.
Ghana’s government has no room to maneuver without borrowing. With debt servicing costs taking up at least 70% of government revenues in 2020, the foreign currency loans are literally choking the treasury. The situation in Ghana is untenable, and there is no way that the country can proceed without assistance from the IMF. Earlier in the year, reports had emerged that the country had been resisting suggestions that it approach the IMF for assistance. The country has gone to the multilateral institution with its cap in hand for assistance after social unrest and protests broke out.
Ghana appears to have become a victim of its success and, dare it be said, a bit of hubris. Fitch Ratings estimated at the end of 2021 that Ghana’s debt load was 81% of its GDP. IMF and World Bank have identified 12 countries in Sub-Saharan Africa with unsustainably high levels of sovereign debts and are likely to default, following Zambia’s example. With its debt to GDP ratio as high as 70%, Zambia was the first country to default on its sovereign debt obligations.