Ghana’s domestic borrowing costs have soared. Finance Minister Ken Ofori-Atta said on Monday interest payments were consuming between 70% and 100% of government revenues.
Other than default-stricken Sri Lanka, that is the worst statistic in the world, according to credit rating agency Fitch. Ghana's public debt was 467.4 billion cedis ($37.4 billion) in September, of which 42% was domestic debt, according to the most recent central bank figures released last month. It is now more than 100% of the GDP, Ofori-Atta said on Monday, as he announced some of the plans the government hopes will bring that ratio down to 55% by 2028. The country is at high risk of debt distress, he said last month while presenting the 2023 budget.
To introduce debt restructuring, the Ghanaian government announced a voluntary Domestic Debt Exchange Programme (DDEP) in early December 2022. It seeks to exchange about GHS 137.3 billion (US$11.45 billion or about 15% of 2021 GDP) of existing domestic notes and bonds held by various local investors for a package of 12 (initially four) new bonds with different pay-out dates.
For any sovereign debt restructuring exercise to succeed, a qualifying majority (usually 75%) of debt holders must agree to change the contract’s key financial terms. The offer was not acceptable to investors as they estimate that they will lose up to 50% of their investment. The chart below indicates a similar pricing on the open market for European listed Ghanian bonds.
The situation arose in the midst of Debt: GDP ratios that are not the worst in the world. For instance, First World countries such as the USA has a Debt: GDP ratio of 129% and that of the UK is 97.4 %. Little wonder that there is a constant concern that the USD cannot sustain its strength.
The Ghanian situation is a timely reminder to South Africa not to sail too close to the wind. In comparison to Ghana, South Africa's gross government debt was projected to increase from 65.6 percent in the current year to 71.6%of GDP by 2022/23. In recent months, fiscal deterioration has accelerated: Gross national government debt is projected to increase from R3.26 trillion (63.5% of GDP) in 2019/20 to R3.97 trillion (81.8% of GDP) in 2020/21. By the end of 2022/23, gross loan debt is expected to amount to R4.83 trillion, or 86% of GDP. These numbers are getting on the risky side and leaves us little room to manoeuvre. Perhaps the tourism minister and her advisers should consider an entry level 101 course in finance to give them perspective on Tottenham Hotspur’s position in our priority list.
The major difference between South Africa and Ghana is the cost of their borrowings. For South Africa, debt-service costs will increase from R204.8 billion in 2019/20 to R236.4 billion in 2020/21, or from 4% of GDP to 4.9% of GDP. Debt-service costs are expected to reach R301.1 billion, or 5.4% of GDP, in 2022/23. Currently the benchmark interest rate in Ghana has been raised to 28% whilst inflation is well over 50%.
The gross domestic product per capita in Ghana was last recorded at 2014.74 US dollars in 2021. The GDP per Capita in Ghana is equivalent to 16 percent of the world's average. Ghana's total public debt stock has shot up to GH¢575.7 billion at the end of November 2022, according to new data released by the Bank of Ghana (BoG).
The graph below indicates how a gradual decline in the value of the Ghanaian cedi over 5 years suddenly spiked to 12 cedis to the USD from 5 cedis to the USD in just three years.
The Bank of Ghana’s January 2023 economic and financial data summary revealed that the debt stock increased by GH¢108.3 billion between September and November 2021. The external component of the country’s public debt shot up to GH¢382.7 billion in November 2022, equivalent to 62.1% of GDP.
The government of Ghana is currently facing serious liquidity challenges and is unable to service its debts. The country has been struggling to refinance its debt since the start of 2022 after downgrades by multiple credit rating agencies on concerns it would not be able to issue new eurobonds.
The Ghana economy is rated as junk by all the important credit rating agencies, Ghana records an inflation rate of 54.1% for the month of December 2022 – the highest in 21 years. In November the inflation rate was 50.3 percent.
The Ghana Statistical Service (GSS) announced that the prices of housing, water, electricity, gas and other fuels rose the most up 82.34% -on-year, followed by furnishings and household equipment at 71.52 percent, and then transport at 71.42 percent. Food and non-alcoholic beverages inflation was at 59.71 percent year-on-year. According to the GSS, inflation for locally produced items was 51.1% while inflation for imported items was 61.9 percent.
The Bank of Ghana raised its benchmark monetary policy rate by 100 bps to 28% during its January 2023 meeting, below market forecasts of 28.75%, bringing borrowing costs to the highest since at least the 2000s, to try to tame soaring inflation and shore up its currency. The annual headline inflation rate is quintuple the 10% ceiling of the central bank’s target range, having reached 54.1% in December of 2022. The economic growth slowed to 2.9% in the third quarter of 2022 from 4.7% in the prior three months and is likely to remain subdued due to the debt crisis and spending pressures. The cedi currency has depreciated around 50% against the dollar last year, as the country is facing multiple financial and economic challenges in its worst economic crisis in decades. Meanwhile, Ghana has secured a US$3 billion bailout from the International Monetary Fund to help it restore macroeconomic stability.
Ghana’s plan to acquire half a dozen L-39NG light combat jets from Aero Vodochody has stalled, with a lack of funds putting the €111 million deal on ice. In August 2021, Ghana’s defence minister, Dominic Nitiwul, sought parliamentary approval for the €111 million procurement of six L-39NG aircraft along with spares, training, and support. The aircraft were to be acquired through a loan agreement.
The lesson that needs to be learnt, is that rating agencies ratings matter. Inflation needs to be reined in and debt cost must remain in line with other debt cost around the globe. Fiscal and monetary policies must adhere to international norms.
Kruger is an independent analyst
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