Formerly praised for its stability and good governance, Ghana has been facing a severe economic crisis since the onset of the Covid-19 pandemic and the war in Ukraine. To prevent Accra from defaulting on its debt, the International Monetary Fund (IMF) on Wednesday approved a $3 billion loan in exchange for austerity measures.

Ghana is finally getting some breathing room. The International Monetary Fund (IMF) approved a three-year, $3 billion loan on May 17 to get the West African country out of its worst economic crisis in decades.

The package "aims to restore macroeconomic stability and debt sustainability while laying the foundation for an inclusive recovery", Kristalina Georgieva, the Fund’s managing director, said in an IMF statement.

The country is expected to receive an immediate first disbursement of about $600 million. The agreement marks the culmination of a round of negotiations that began in December 2022, when Ghana announced that it would need to default on its debts.

IMF approval was far from a foregone conclusion. However, a promise from its creditors, led by France and China, to restructure its debt may have broken the deadlock.

The end of 'Ghana beyond aid'

According to the World Bank, Ghana is one of the most indebted countries on the continent, with a debt of $58 billion representing 105% of its GDP.

"We focus a lot on the external debt to international creditors, but it is important to bear in mind that most of Ghana's public debt is domestic debt held by the country's commercial banks," says Marc Raffinot, a senior lecturer at Paris Dauphine University and a development specialist.   

With the IMF’s help, Ghana hopes to get out of debtor's doldrums and regain the confidence of markets and investors. However, the need for international support is a blow to public opinion and President Nana Akufo-Addo, who rose to prominence with the slogan "Ghana beyond aid", promising Ghana's economic independence from rich countries.

In 2019, the president notably put an end to the agreement which provided for a loan of $1 billion that his predecessor, John Dramani Mahama, had signed with the IMF in exchange for an austerity plan. This was supposed to mark a new era of emancipation for Ghana.

But four years later, the government is now forced to knock on the Washington institution’s door and face new austerity measures. After raising VAT by 2.5%, freezing civil service recruitment and reducing state expenditures, the government has now committed to raising taxes. Other painful reforms are also expected to be implemented.

Formerly a model country in West Africa

Ghana had long been a model country in West Africa and seen as an ideal destination for foreign investment due to its stable democracy, reputation for good governance – compared to its neighbours – and business-friendly climate.

A major gold exporter with large oil and gas reserves, Ghana is also a leading agricultural power. It is the world's second-largest cocoa producer after the Ivory Coast and a major player in the production of yams, cassava (a potato-like root vegetable) and plantains (a type of banana).

Buoyed by the rise in commodity prices and its hydrocarbon production, Ghana recorded more than 6% growth in 2018, making the small country of 30 million people a growth engine for the continent.

However, it had not counted on the shock of the Covid-19 pandemic which, as for other African countries, brought Ghana’s economy to a standstill. The war in Ukraine and its impact on energy prices has further weakened the country’s economy, since despite being a producer of crude oil, Ghana must import refined petrochemical products due to lacking refinery capacity.

"There is also a third shock: the rise in interest rates in the United States and Europe, which has made investors more wary about taking financial risks," says Raffinot.

In addition, inflation has soared above 40% while the local currency has collapsed. This has made life extremely difficult for millions of Ghanaians, who are now worried that they will have to tighten their belts even more following the announcement of an agreement with the IMF.

A summit in Paris in June

The idea of further belt-tightening is a legitimate concern, as Ghana must already allocate a third of its resources to repaying its foreign debt. And this alarming situation, far from being isolated in Africa, illustrates the difficulties that the poorest countries – hit hard since 2020 by a series of health, energy and climate crises – face.

According to a 2022 United Nations Development Programme (UNDP) report, more than 54 low- and middle-income countries are critically over-indebted and need urgent debt relief to transform their economies and adapt to climate change. Chad, Ethiopia and Zambia, which is currently in negotiations with the IMF, are just some of the many countries suffering from severe debt problems.

To resolve this situation, the UN is calling for an acceleration of debt restructuring for poor countries and new financing. The issues of climate change and debt will be the focus of a summit taking place on June 22 and 23 in Paris ahead of the next COP in the United Arab Emirates.

At the summit, France plans to initiate discussions on new solidarity mechanisms to support the most vulnerable countries’ ecological transitions. In particular, Paris may back the idea of imposing an international tax on multinationals in the energy sector or on maritime transport.

China has announced that it will be attending this conference, which UN Secretary General Antonio Guterres and White House climate envoy John Kerry are also expected to attend.

This article has been translated from the original in French.